Important Developments Implementing the CARES ACT and FFCRA: How the PPP, EIDL, and Tax Credits Are Impacting Businesses, Churches, and Nonprofits
By William R. Thetford, Esq. and H. Robert Showers, Esq.
Last Updated: April 29, 2020.
Note: This is the subject of a rapidly evolving landscape. Please stay tuned for updates as they become available.
This article updates our series of articles on the CARES Act concerning the Paycheck Protection Program (PPP) and Emergency Injury Disaster Loans (EIDL) and grants. For more information, please click here to view our other recent articles discussing the Coronavirus and legal implications.
Last week Congress passed, and the President signed into law, legislation expanding funding for the PPP and EIDL programs last week. Banks started processing new loans on Monday. The legislation roughly doubles the amount of funding for both the PPP and the EIDL.
Below we discuss important updates based on changes or additions to the SBA guidance, information we have gleaned as we walked others through the process that may help those still seeking PPP funding, and important observations on preparing for PPP forgiveness.
- How do I complete the application process and get my bank to move it forward?
Many small businesses, churches, or nonprofits found themselves left out of the first round of funding because there was more demand than there was money, and some of the larger banks were prioritizing existing customers (especially bigger customers). It became imperative that you have an existing relationship with a bank and a direct contact.
The next round of funding is designed to reach some of the smaller entities that missed the first round. However, funding is still likely to go fairly quickly. We have heard estimates within the industry of one to two weeks before this round of funding is also exhausted. Thus, if you are in need of PPP funding it is important that you get your application through quickly.
Based on what we have seen here, this is what is most likely to help you be successful in this second round:
A. Consider banking relationships.
If you have a relationship with a bank, use it. Be in touch with your direct contact if available. Too many applications were left in the banks system last time. The banks have been prioritizing those with whom it has relationships.
If you do not have a relationship with any bank or your only relationship is with a bigger bank that was unresponsive to you in the first round, consider finding a smaller community bank. We have known many clients have success applying or reapplying with smaller banks.
B. Do I need to apply again?
If you completed your application before funds were exhausted, but it was not processed by the SBA or funded you should not have to reapply, but you may want to. Contact your bank to make sure they are going to send it to the SBA and to confirm with you when they have. If your bank is unresponsive or you do not have a good contact there, consider reapplying through a smaller bank. Many of the smaller banks are seeking to win long term customers by serving small businesses, nonprofits, and churches well during this time – and we expect that many of them will be successful. Look for one of those banks; you may find one who is able to help you make it through the process. Some of the funds in this iteration of the PPP funding are reserved exclusively for small community banks.
We understand that some have had success with multiple applications. You cannot be approved for more than one loan, but if the SBA system holds, the instant one of your applications is approved by the SBA, your other applications will be disregarded.
C. How to calculate the loan amount?
The SBA also recently released a helpful and streamlined way to calculate your loan amount step-by-step specific to several different entity types.
- Have the qualification requirements changed?
After negative press about not so “small” businesses that received large PPP loans, despite significant size and large cash reserves, the SBA issued new guidance and a new Interim Final Rule on the subject. The SBA has also signaled its intention to prevent fraud and has stated that it will audit PPP loans above $2,000,000.[1] However, the certification that applicants must sign remains the same: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This language was and remains extremely broad as nearly every business, church, and nonprofit has been impacted by the economic uncertainty that has come as a result of COVID-19 and all the associated orders, restrictions, and limitations. It appears that the SBA is encouraging essentially an honor system to ask businesses not to take the funding, or return the funding, if it is not truly “necessary” and may take action against obvious and egregious bad-faith actors. The new guidance reads:
- Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
In other words, the requirements have not themselves changed. There are still no formal or objective financial need-based tests to qualify for the PPP. However, there is increasing public scrutiny about those who take the funds without really needing them. Applicants must make a good faith certification that the economic uncertainty makes the loan “necessary.” The word “necessary” can be interpreted a number of different ways. For any organizations that feel they should not have taken the loan or made the certification, they may return the loan by May 7, 2020 without being considered to have made a certification in bad faith or penalized for it.
The SBA also just answered a similar frequently asked question “do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan” by referring back to the guidance from Question 31 above.[2]
Essentially, if your organization has strong enough cash reserves to ride out financial uncertainty for many months, credit is easily available, and your functions have not been heavily impacted by COVID-19 or the stay at home orders, you should probably not apply for the loan or make this certification. We expect that the majority of small businesses, nonprofits, and churches will be impacted enough to be able to make this certification in good faith.
- Housing Allowances or Stipends Constitute Qualifying Payroll Costs under the PPP.
The SBA also released long-awaited guidance as to housing allowances. Churches are especially impacted as many churches compensate their pastor or ministers in part through a housing allowance in place of other income.
These allowances provided to an employee as part of compensation are approved payroll costs, but they are subject to the $100,000 cap on direct compensation to any individual employee.[3] Other benefits may be counted in excess of $100,000.[4]
- How will the loan be forgiven?
It is important to note that as the program is at its beginning stages and no applicant has begun the forgiveness process, there are many unknowns and we will likely receive more guidance from the SBA in a few more weeks once the first borrowers begin to be eligible for PPP loan forgiveness. We relay what is known about the program thus far, but please remember this guidance may be subject to change depending on how the SBA and the banks begin implementing the process.
Step 1: Plan from the beginning how you will spend the loan proceeds. Loan forgiveness is based on how the loan proceeds are spent in the eight weeks following the disbursal of the loan. Any portion that is not spent on allowable purposes will not be forgiven. In fact, any amount not actually spent will not be forgiven. In addition, though there are multiple categories of expenditures allowable for the loan proceeds, for the entire loan amount to be forgiven, employers must use at least 75% of the loan proceeds for eligible payroll costs. In other words, not more than 25% of the forgiven amount can be for covered non-payroll costs (like mortgage interest, rent, or utilities).
Plan your spending so that at least 75% are directly attributable to payroll costs and 25% to other qualifying costs (mortgage interest, rent, or utilities, for instance) if you want the entire amount forgiven.
Step 2: You will need to document and provide to your bank amount of the proceeds that you spent on each eligible category.
Step 3: Calculate and Demonstrate the number of Full-Time Equivalent (FTE) employees you have on average per month during the eight weeks following the disbursal. Even though you had to list the number of total employees (without regards to hours worked) on the loan application to verify eligibility, the forgiveness is calculated on the difference between the number of FTE employees you had at the end of the eight-week period compared to before the loan.
Step 4: Calculate the number of FTE employees you have in each of two comparison periods. If you have the same amount of employees or greater at the end of the eight weeks as you had in the comparison period, the entire loan can be forgiven (or as much as you are eligible for under Steps 1 and 2). If you have fewer FTE employees, you will have the amount of forgiveness proportionally reduced. The two comparison periods are (1) between February 15, 2019 and June 30, 2019 and (2) between January 1, 2020 and February 29, 2020. The comparison period you use is up to you. Obviously, it is in your best interest to pick a comparison period with a lower number of FTE employees to ensure that your final FTE numbers are the same or greater.
There are special exceptions for seasonal employers as well in calculating the FTE difference.
Reducing the income by 25% or more of your employees (who make less than $100,000) will also reduce the amount of forgiveness for which you are eligible.
If you experience a reduction in employees or wages between February 15, 2020 and April 27, 2020, you may qualify for an exemption to the ordinary loss of loan forgiveness if you bring the numbers of employees and wages back to February 15, 2020 levels by June 30, 2020 at the latest.
Step 5: Follow your bank’s instructions and submit documentation supporting your payroll and FTE calculations to the bank that processed your loan.
Since most employees are paid on a delay (i.e. they are paid for time worked approximately two weeks after those days), some businesses have questioned whether the payroll and employee count for the eight-week period will be calculated based on the dates worked or the dates payroll is run and paid. The SBA will hopefully bring clarity to this issue. Since it appears simpler to calculate on the basis of when payroll is paid, we expect that the SBA will accept that method. Be sure you retain the documentation necessary for either approach until the SBA clarifies.
- Will accepting PPP funds erode my church or religious organization’s religious liberty?
A number of organizations have contacted us with questions and concerns about the religious liberty implications of accepting the funds as a church or religious nonprofit. We understand and share the initial skepticism as receipt of government funding has been used in the past as a vehicle for reducing the religious freedom of organizations and often comes with strings attached. It is true that strings normally are attached and that there is always a risk in accepting federal funding.
As a result of these fears a number of religious liberty advocates as well as many of the Senators who passed the CARES Act wrote a series of letters[5] requesting that the Treasury and SBA issue guidance that they will honor the intent of the Senate to disburse this funding without infringing upon the religious liberty of people, churches, and organizations that serve their communities. We are happy to report that the SBA has responded to many of these requests and now the federal regulations implementing the CARES ACT and other formal SBA guidance explicitly protecting religious liberty.
Accordingly, despite the initial concern, we note that the CARES Act with the PPP is one of the few times that we expect that churches and religious nonprofits can feel comfortable accepting federal funding. The goal of the CARES Act is to inject money into the economy to stimulate more transactions and mitigate the coronavirus-induced slowdown. The goal of the Paycheck Protection Program, as the name implies, is to help employers keep paying their employees so that the government does not have to spend money on the same people via unemployment and other need-based welfare programs that will require added government costs and burdens in addition to the dollars actually transferred.
There are at least eight protections available to churches and religious organizations accepting PPP funding. We have noted some of these in our prior articles but for the sake of comprehensiveness we include each here.
First, The Supreme Court has repeatedly made clear that under the First Amendment, governments may not prohibit churches and religious organizations from receiving a generally available benefit on account of their religion. For a church to participate in such a program is not a forfeiture of church or protected status, nor is it an excessive entanglement of government and religion. It is simply allowing a program to serve people and different entities. This principle was most recently reaffirmed by the Supreme Court in Trinity Lutheran v. Comer in 2017.
Second, some have (reasonably) feared that the certification language requiring recipients to comply with certain nondiscrimination provisions in the Federal code would, in time, bring a requirement that religious organizations act contrary to their sincerely held religious beliefs concerning marriage and sexuality. However, the PPP application wording has been changed to reflect that this certification only applies to “businesses” not churches or religious nonprofits.
Third, existing law, and new SBA guidance protects the religious liberty of PPP fund recipients. Many churches are already covered by Title VII of the Civil Rights Act and their rights are nonetheless acknowledged to make hiring decisions consistent with their religious standards, for instance, hiring only hiring only co-religionists, etc.
Fourth, the SBA has issued guidance to explain that while “Consistent with certain federal nondiscrimination laws, SBA regulations provide that the recipient may not discriminate on the basis of race, color, religion, sex, handicap, age, or national origin with regard to goods, services, or accommodations offered, 13 C.F.R. § 113.3(a)” . . . SBA regulations also make clear that these nondiscrimination requirements do not limit a faith-based entity’s autonomy with respect to membership or employment decisions connected to its religious exercise. 13 CFR § 113.3-1(h).”[6]
SBA recognizes the various protections for religious freedom enshrined in the Constitution and federal law that are not altered or waived by receipt of Federal financial assistance.
SBA therefore clarifies that its regulations apply with respect to goods, services, or accommodations offered generally to the public by recipients of these loans, but not to a faith-based organization’s ministry activities within its own faith community. For example, SBA’s regulations will require a faith-based organization that operates a restaurant or thrift store open to the public to serve the public without regard to the protected traits listed above. But SBA’s regulations do not apply to limit a faith-based organization’s ability to distribute food or clothing exclusively to its own members or co-religionists. Indeed, SBA will not apply its nondiscrimination regulations in a way that imposes substantial burdens on the religious exercise of faith-based loan recipients, such as by applying those regulations to the performance of church ordinances, sacraments, or religious practices, unless such application is the least restrictive means of furthering a compelling governmental interest [i.e. unless the normal standard exceptionally high standard applies regardless of receipt of federal funding].[7]
The SBA has also given formal guidance that:
Receipt of a loan through any SBA program does not (1) limit the authority of religious organizations to define the standards, responsibilities, and duties of membership; (2) limit the freedom of religious organizations to select individuals to perform work connected to that organization’s religious exercise; nor (3) constitute waiver of any rights under federal law, including rights protecting religious autonomy and exercise under the Religious Freedom Restoration Act of 1993 (RFRA), 42 U.S.C. § 2000b et seq., Section 702 of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-1(a), or the First Amendment.
Simply put, a faith-based organization that receives a loan will retain its independence, autonomy, right of expression, religious character, and authority over its governance, and no faith-based organization will be excluded from receiving funding because leadership with, membership in, or employment by that organization is limited to persons who share its religious faith and practice.[8]
Fifth, the Interim Final Rule implementing the CARES Act officially and explicitly contains religious freedom protections. Section 5 of the Interim Final Rule states:
All loans guaranteed by the SBA pursuant to the CARES Act will be made consistent with constitutional, statutory, and regulatory protections for religious liberty, including the First Amendment to the Constitution, the Religious Freedom Restoration Act, 42 U.S.C. 2000bb–1 and bb–3, and SBA regulation at 13 CFR 113.3–1h, which provides that nothing in SBA nondiscrimination regulations shall apply to a religious corporation, association, educational institution or society with respect to the membership or the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution or society of its religious activities. SBA intends to promptly issue additional guidance with regard to religious liberty protections under this program.[9]
After releasing the Interim Final Rule, the SBA did follow with the further guidance mentioned here, Frequently Asked Questions Regarding Participation of Faith-Based Organizations in the Paycheck Protection Program.
Sixth, as an added buffer between the government and recipients, all PPP loans are made through private banks.
Seventh, SBA guidance confirms that “[a]ny legal obligations that you incur through your receipt of this loan are not permanent, and once the loan is paid or forgiven, those nondiscrimination obligations will no longer apply.”[10]
Eighth, the Ministerial Exception, the judicial doctrine protecting churches under the First Amendment likely protects Churches and some other religious organizations in employment matters regardless of the Act or Regulations. We note that these protections are greatest for churches and church auxiliaries but may apply to some religious educational institutions to some degree as well.
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Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers or Will Thetford at wrt@simmsshowerslaw.com or call at 703.771.4671 for legal advice that will meet your specific needs.
[1] Sylvan Lane, Mnuchin: Small business coronavirus loans above $2M will be audited, The Hill, Apr. 28, 2020, https://thehill.com/policy/finance/495032-mnuchin-small-business-coronavirus-loans-above-2m-will-be-audited.
[2] Treasury Department, Paycheck Protection Program Loans: Frequently Asked Questions, last updated Apr. 28, 2020, Question 37, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
[3] Id. Question 32.
[4] Id. Question 7.
[5] Sens. Cruz, Lankford, Inhofe, Lead Letter to Treasury, SBA to Ensure Protection for Faith-Based Entities, Full Letter to SBA, https://www.cruz.senate.gov/files/documents/Letters/4.14.20%20-%20Letter%20to%20SBA%20and%20Treasury%20on%20CARES%20Implementation.pdf.
[6] Small Business Administration, Frequently Asked Questions Regarding Participation of Faith-Based Organizations in the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Program, Question 5, Apr. 3, 2020, https://www.sba.gov/sites/default/files/2020-04/SBA%20Faith-Based%20FAQ%20Final.pdf.
[7] Id.
[8] Id. at Question 2.
[9] Interim Final Rule, 13 CFR part 120, as contained in the Federal Register, Volume 85, No. 73, 20811-17, https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf.
[10] Small Business Administration, Frequently Asked Questions Regarding Participation of Faith-Based Organizations in the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan Program, Question 5, Apr. 3, 2020, https://www.sba.gov/sites/default/files/2020-04/SBA%20Faith-Based%20FAQ%20Final.pdf.
