Nonprofit PPP EIDL Loans – Emergency Coronavirus Relief Act of 2020 overviews what INSIDE CHARITY has learned about legislation being FINALIZED TODAY between the U.S. Senate and U.S. House of Representatives. Hundreds of thousands of charitable organizations have been waiting for a second round of Paycheck Protection Program (“PPP”) loans to keep their nonprofits operational. The “Emergency Coronavirus Relief Act of 2020” has been drafted to correct a number of problems that PPP borrowers have had, and also opens the door to new opportunities for charities who were not treated as well under the previous program.
Though the bill has many unrelated provisions regarding nonprofits ($600 per person stimulus check, additional $300 per week unemployment benefit) the following appropriations are to be made available through September 30, 2021 for charitable organizations:
PPP Loans Which are Forgiven Will Be Deductible
The IRS has issued a series of Revenue Procedures and Notices that alarmed many PPP borrowers by stating that expenses paid for with forgiven loans will not be able to be deducted. This was against Congress’s intent, and the new Act clarifies their position. The new Act states as follows:
(2) no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1)
Eligible Charities May Have a Second Chance to Receive a PPP Loan
Many nonprofits have requested a second round of PPP loans, and many potential borrowers who were unable to receive a PPP loan during the first round would like to have access to a PPP loan. The new Act allows new and old borrowers to receive a PPP loan if they meet the requirements of an “eligible entity.”
An “eligible entity” will need to satisfy the “Necessity Test” which is based upon whether the loan is “necessary to support the on-going operations of the applicant” will be hard to meet by charities that have survived one or two hard quarters but are now making ends meet while waiting for the vaccines to clear our economy up. While the SBA has announced that it will not question the necessity issue for those who have aggregate borrowings not exceeding $2 million, other agencies, or even whistleblowers, may, and the fact that a second loan has been received will not be kept confidential.
Assuming that the necessity test will be met, the next question is whether the PPP borrower is an “eligible entity” that meets the following requirements:
For purposes of the above 30% reduction in gross receipts test, borrowers who were not in business during the first, second, or third quarter of 2019 (January 1 – September 30), but were in business during the fourth quarter of 2019 (October 1 – December 31), can compare the first, second, or third quarter of 2020 (January 1 – September 30) to the fourth quarter of 2019.
If the charity was not in business during 2019 but was in business by February 15, 2020, then such borrower can compare their gross receipts during the second or third quarter of 2020 (April 1 – June 30) to the first quarter of 2020 (January 1 – March 30) to see if they qualify.
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Additional Loans Cannot Exceed $2,000,000 per Borrower–90 Day Wait Between Loans
The loan amounts for a vast majority of borrowers will be almost identical to what the borrower received for their original PPP loan. This second round of funding, however, is capped at $2 million per borrower rather than $10 million under the initial round of PPP loans in the CARES Act. For borrowers who received a PPP loan within the last 90 days, the new Act requires that the aggregate of the new and old loan not exceed $10 million.
No Enforcement Action Against Banks
The new Act provides that there will be no “enforcement action” with respect to lenders. The Act states as follows:
(2) NO ENFORCEMENT ACTION.—With respect to a lender that relies on the certifications and documentation described in paragraph (1) relating to a covered loan—
(A) no enforcement or other action may be taken against the lender relating to loan origination, forgiveness, or guarantee of the covered loan based on such reliance, including claims under—
(i) the Small Business Act (15 U.S.C. 631 et seq.);
(ii) sections 3729 through 3733 of title 31, United States Code (commonly known as the ‘False Claims Act’);
Simplified Application for Loans Under $150,000
Charities who received less than $150,000 in PPP loans during the first round will now only have to submit a one-page application for forgiveness, but all of the same rules apply. The signer of this application may as well sign the longer application to make sure that they have everything done right because personal liability can be enormous. It has been recommended that nonprofits consult with their CPAs carefully and fill out the long application but actually submit the short application, with their answers in the long application being kept in case they are ever investigated.
The new Act states as follows:
(A) IN GENERAL.—Notwithstanding subsection (e), with respect to a covered loan made to an eligible recipient that is not more than $150,000, the covered loan amount shall be forgiven under this section if the eligible recipient submits to the lender a one-page online or paper form, to be established by the Administrator not later than 7 days after the date of enactment of the Continuing the Paycheck Protection Program Act, that attests that the eligi1ble recipient complied with the requirements under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)).
Changes to the Application Process for Forgiveness of Loans Between $150,000 and $2,000,000
In regards to the loan forgiveness application for covered loans between $150,000 and $2,000,000, the new Act states as follows:
(A) IN GENERAL.—Notwithstanding subsection (e), with respect to a covered loan made to an eligible recipient that is more than $150,000 and not more than $2,000,000—
(i) the eligible recipient seeking loan forgiveness under this section—
(I) is not required to submit the supporting documentation described in paragraph (1) or (2) of subsection (e) or the certification described in subsection (e)(3)(A);
(II) shall retain—
(aa) all employment records relevant to the application for loan forgiveness for the 4-year period following submission of the application; and
(bb) all other supporting documentation relevant to the application for loan forgiveness for the 3-year period following submission of the application; and
(III) may complete and submit any form related to borrower demographic information;
(ii) review by the lender of an application submitted by the eligible recipient for loan forgiveness under this section shall be limited to whether the lender received a complete application, with all fields completed, initialed, or signed, as applicable; and
(iii) the lender shall—
(I) accept the application submitted by the eligible recipient for loan forgiveness under this section; and
(II) submit the application to the Administrator.
PPP Borrowers Can Select Covered Period for as Short as 8-Weeks and as Long as 24-Weeks
Nonprofits are now able to choose the 8 to 24 week covered period during which the borrower is required to spend a sufficient amount on qualified expenses to receive forgiveness. This begins the day the borrower received the funds and ends on any day selected by the borrower, but no earlier than 8-weeks from the date the loan proceeds are received and no later than 24 weeks after such date of origination.
This change will enable borrowers to cut off the testing period before making a reduction in workforce that would cause the applicable reduction in workforce penalties to apply, as long as the workforce is at its pre-February 15 levels on the last day of the Covered Period. The Act states as follows:
(4) the term ‘covered period’ means the period—
(A) beginning on the date of the origination of a covered loan; and
(B) ending on a date selected by the eligible recipient of the covered loan that occurs during the period—
(i) beginning on the date that is 8 weeks after such date of origination; and
Expanded Eligibility for 501(c)(6) Organizations
Organizations that are classified as a 501(c)(6) will have expanded eligibility to PPP loans. A 501(c)(6) is defined as follows:
(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
The Act states as follows regarding 501(c)(6) eligibility:
(I) IN GENERAL.—Except as provided in subclause (II), any organization that is described in section 501(c)(6) of the Internal Revenue Code and that is exempt from taxation under section 501(a) of such Code (excluding professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity) shall be eligible to receive a covered loan if—
(aa) the organization does not receive more than 10 percent of its receipts from lobbying activities;
(bb) the lobbying activities of the organization do not comprise more than 10 percent of the total activities of the organization; and
(cc) the organization employs not more than 150 employees.
The New Kid on the Block—Targeted EIDL Program For Businesses Hardest Hit by the Coronavirus
The new Act creates a targeted EIDL program to assist businesses that were hardest hit by the economic impacts of the Coronavirus. The EIDL program was initially enacted many years ago to provide loans to businesses that have suffered from major storms, droughts, and other federally-declared disasters. EIDL loans bear interest at 3.75% and come with significant loan program requirements that very few borrowers are aware of or have thought about.
EIDL borrowers must keep records of how the EIDL loan is spent, and provide this information to the SBA within 90 days after the loan is repaid. There is a lack of privacy for the borrower of an EIDL loan, and the loan details are available to the public because of the Freedom of Information Act, enumerated at 5 U.S.C. § 552.
The term “covered entity” for the targeted EIDL program is stated as follows:
(i) means any entity that, during the covered period, is eligible for a loan made
under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) (as expanded under section 1110(b) of the CARES Act (15 U.S.C. 9009(b))), if that
(I) has not more than 25 employees; and
(II) has suffered an economic loss of not less than 30 percent; and
(III) except with respect to an entity included under section 123.300(c) of title 13, Code of Federal Regulations, or any successor regulation, does not include an agricultural enterprise.
The amount of funding that a covered entity is eligible for in the targeted EIDL program is stated as follows:
(A) IN GENERAL.—The amount of funding provided to a covered entity that submits a request under paragraph (2) shall be in an amount that is the lesser of—
(i) the amount of working capital needed by the covered entity for the 180-day period beginning on the date on which the covered entity would receive the funding, as determined by the Administrator using a methodology that is identical to the methodology used by the Administrator to determine working capital needs with respect to an application for a loan submitted under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)); or
The priority for the targeted EIDL program is as follows:
(8) PRIORITY.—During the 56-day period beginning on the date of enactment of this Act, the Administrator may approve a request for funding under this subsection only if the request is submitted by—
(A) a covered entity located in a low-income community;
(B) a covered entity owned or controlled by a veteran or a member of the Armed Forces; or
(C) a covered entity owned or controlled by an economically disadvantaged individual or a socially disadvantaged individual.
This new Act will provide much needed relief to charities affected by the Coronavirus. There are sure to be numerous SBA pronouncements that follow, but I will stay informed on the topic to keep readers posted.
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Nonprofit PPP EIDL Loans – Emergency Coronavirus Relief Act of 2020 was based in part on Forbes Magazine December 19th Article by Alan Gassman.
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Very informative and helpful