In March 2020, Congress passed the Paycheck Protection Program (PPP) as an attempt to save jobs and see organizations through the COVID-19 global pandemic. The first round of PPP (PPP1) funded approximately $525 billion in loans through August, when the application period ended. According to the most recent data from the Small Business Administration (SBA), approximately 32% of loans have completed the forgiveness application process, with approximately 99% of those loan values being forgiven.
In December 2020, the Consolidated Appropriations Act, 2021 was signed into law, which includes approximately $284.5 billion in new PPP funding (PPP2) and reopens the PPP for first-time borrowers. The application period for PPP2 funding was recently extended and will end on May 31, 2021.
In general, the PPP2 loan terms are as follows:
- 1% interest rate
- 5-year maturity
- No collateral required
- No personal guarantees are required
Who May Apply
Organizations applying for a first-draw PPP loan, limited to $10 million, must have fewer than 500 employees (both full-time and part-time US residents may be considered). In addition, the organization must have been operating as of February 15, 2020.
Organizations applying for a second-draw PPP loan, limited to $2 million, must have fewer than 300 employees, have used (or will use) the entire amount of their PPP1 loan, and have seen a decline of 25% or more in gross receipts in any quarter in 2020 when compared to the same quarter of 2019. PPP loan proceeds should not be included in the calculation of gross receipts. In addition, an organization applying for a second draw must also certify that the loan is necessary to support ongoing operations. Organizations that are under common control may be considered affiliated by the SBA and may have to aggregate their data when applying for PPP funding.
The SBA is now only allowing community financial institutions, which include Community Development Financial Institutions, Minority Deposit Institutions, and micro lenders, among others, to make PPP loans. These organizations have approximately $6 billion available for lending before the program ends at the end of May.
Loans under the PPP are limited to 2.5 multiplied by the organization’s average monthly payroll cost. The organization may use the payroll costs for 2019, 2020, or the 12 months preceding the loan application. The organization may use the highest average monthly payroll cost from those time periods. The organization must cap the annualized pay-per-employee at $100,000 for purposes of the loan application. Only the wages are subject to the $100,000 limit. The healthcare benefits, retirement plan contributions and employer’s state and local payroll taxes can be added to the wages in calculating the average monthly payroll cost.
EIDL advances do not need to be deducted from the PPP loan forgiveness amount.
Borrowers must use at least 60% of the PPP funding for payroll costs (salaries, healthcare benefits, retirement plan contributions, and employer’s state and local payroll taxes), and the remaining 40% for nonpayroll costs, such as rent, mortgage interest, utilities, operating costs, damage costs, supplier costs, worker protection costs, etc. The organization may choose any time period between 8 and 24 weeks for the covered period.
- Certain 501(c)(6) organizations are now eligible for PPP funding:
- Business leagues
- Chambers of commerce
- Real estate boards
- Boards of trade not organized for profit with no earnings inuring to any shareholder or individual
- Religious organizations are eligible for PPP loans.
- If a nonprofit pays its employees directly, those salaries may be included in the calculation of gross salaries, even if those salaries are covered by a government grant. However, if the government pays the staff directly, those amounts should not be included in the calculation of gross salaries.
- A nonprofit organization must be careful as payroll costs paid with PPP loans or any other Federal CARES Act programs must not be also charged to current federal awards as it would result in the federal government paying for the same expenditures twice. If possible, the nonprofit might attempt to defer using government grants to cover payroll during its covered loan period, allowing it to maximize PPP loan forgiveness. If it is not possible to defer using government grants to cover payroll during the covered loan period, the nonprofit must exclude the portion of its payroll costs that are covered by the federal grants from its loan forgiveness.
- Many nonprofit organizations are also interested in utilizing the Employee Retention Credit (ERC). As there is some interplay between ERC and PPP, it is important to remember that PPP borrowers are eligible to claim ERC and can apply retroactively to wages paid after 3/12/20; however, an ERC cannot be claimed on the same wages that were used for PPP loan forgiveness (no double-dipping).
If your organization meets the criteria to apply for PPP funding, it is important to do so as it is a great tool to strengthen the financial health of your organization in the near future. The application period was recently extended and will end on May 31, 2021.