CARES Act Small Business Loans for Nonprofits and Churches

Updated April 30, 2020.

On March 27 the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law to provide relief to individuals and businesses affected by the novel coronavirus, COVID-19 pandemic. There are a number of provisions that apply to nonprofit organizations, including churches and religious organizations, from an employment standpoint, an economic relief standpoint, and a tax standpoint. The following information provides guidance for nonprofits and churches trying to navigate the economic uncertainty caused by COVID-19.

Paycheck Protection Program

One of the key provisions in the legislation is the expansion of the Paycheck Protection Program, a Small Business Administration (SBA) loan guaranty program. The CARES Act expands both the businesses (and nonprofits) eligible to receive these loans and the eligible lenders.

Who is eligible to receive a Paycheck Protection Program loan?

The following types of businesses qualify for loan relief under the CARES Act, provided they were in operation as of February 15, 2020:

  • Businesses with no more than 500 employees or that otherwise meet the applicable size standard for their specific industry as set forth in existing SBA regulations
  • Nonprofit organizations, including churches and religious organizations
  • Sole proprietorships
  • Independent contractors
  • Self-employed individuals
  • Businesses in the accommodation and food services industry with more than one location and over 500 employees, if no more than 500 employees work at each location

What types of expenses can a loan recipient use these funds for?

Loan funds may only be used for:

  • Payroll costs
  • Interest payments on mortgages or other debt obligations incurred before February 15, 2020
  • Rent
  • Utilities

With respect to payroll costs, the loan funds may cover employee compensation; leave payments (including vacation, family, and sickness); severance payments; group healthcare benefits and insurance premium payments; retirement benefits; and employment taxes at the state and local level. Loan funds shall not be used to compensate an employee, independent contractor, or sole proprietor in excess of $100,000. Eligible payroll costs also do not include compensation for employees residing outside of the U.S. or leave payments already covered by the Families First Coronavirus Response Act (FFCRA).

Additionally, eligible interest payments do not include principal payments or prepayments.

Is there a maximum loan amount?

Yes. Each eligible business may borrow up to $10 million or 2.5 times their total monthly payroll expenses from the prior year, whichever is less. On April 24, 2020, the Small Business Administration provided guidance on calculating the maximum loan amount for all business types. Question # 7 addresses the maximum loan amount for nonprofit religious institutions, veterans organizations, and tribal businesses, and question # 6 addresses the maximum loan amount for all other nonprofits.

What are the loan terms?

There is a 4% cap on interest rates, and all payments (for principal, interest, and fees) will be deferred for at least six months up to one year. Notably, the SBA will not collect annual or guarantee fees and has no remedy for nonpayment unless the loan funds have been used for nonqualified expenses.

Borrowers do not have to provide a personal guarantee or collateral to receive loan funds or prove they are unable to get credit through another source, all of which are traditionally required for SBA loans. Instead, eligible employers must provide good faith certification that the uncertainty of current economic conditions justifies the loan request, the funds will be used for one of the qualified purposes outlined above, and they do not have an SBA loan application pending or have received such a loan from February 15, 2020 through December 31, 2020.

The SBA will provide further guidance regarding how to apply and find qualified lenders.

Are these loans eligible for forgiveness?

Yes, under section 1106 of the Act, loan recipients are eligible for loan forgiveness for loans made between March 1, 2020 to June 30, 2020 (the covered period) in an amount equal to the cost of payroll expenses, mortgage interest, rent, and utility payments during the 8 weeks beginning on the origination date of the loan, not to exceed the principal loan amount. The amounts forgiven will be considered canceled indebtedness by authorized lenders.

There may be a reduction in the amount of loan forgiveness where an employer reduces either the number of employees (compared to the year prior) or the pay of any employee making less than $100,000 by more than 25% (compared to the last calendar quarter). This reduction is calculated using a specific formula set forth in the Act. We recommend seeking professional guidance to calculate any anticipated forgiveness reduction.

Employers of tipped employees may also receive forgiveness for additional wages paid to such employees.

How does a business obtain loan forgiveness?

To receive loan forgiveness, eligible businesses must submit a loan forgiveness application to the lender that originated the loan. The application shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates. Applicants will also be required to provide IRS payroll tax filings; state income, payroll, and unemployment insurance filings; and financial statements verifying payment on debt obligations incurred before the covered period. We recommend nonprofits interested in applying for a loan compile the following information:

  • 2019 payroll data, along with the last 12 months of payroll data
  • 2019 W-2s for employees and 1099s for independent contractors who would otherwise be employees
  • Healthcare costs paid under a group health plan
  • Retirement benefits paid for by the organization

Eligible businesses must also make a good faith certification that the uncertainty of current economic conditions justifies the loan request to support their ongoing operations and that funds will be used to retain workers and maintain payroll.

The Small Business Administration will issue further guidance and regulations regarding loan forgiveness.

What happens if a loan has a remaining balance even after forgiveness?

If a covered loan has a remaining balance after the application of forgiveness due to the reductions described above, the outstanding balance will have a maximum maturity of 10 years from the date the borrower applied for forgiveness.

Will acceptance of these loan funds impact the religious liberties of a church or other religious organization?

The SBA has issued guidance to confirm that faith-based organizations may participate in the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan Program (EIDL) without sacrificing their religious autonomy. Read more here.

We will continue to provide updates as regulations are issued. For more resources for nonprofits and churches related to the novel coronavirus pandemic, visit our COVID-19 resources page.


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