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Tax-Exempt Organizations and the Paycheck Protection Program

By Mario Urso, on March 31st, 2020

One significant issue a number of healthcare and tax-exempt organizations face in light of the novel COVID -19 pandemic is their ability to maintain and pay their workforce. Shelter in place guidance and the closing of many organization’s business locations has resulted in the displacement of many workers. Switching to remote working environments, while laudable, is just not practical or available for many organizations.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed March 27 provides a bit of good news in this regard. The CARES Act provides for something known as the “Paycheck Protection Program”. The program provides incentives to keep an organization’s employees on the payroll through this difficult economic time. This is a covered loan program administered under the auspices of the SBA. However, the authority to lend has been delegated to approved lenders. After receiving the loan, provided certain criteria are met, all or a portion of the loan may have the ability to be forgiven. This program’s key provisions are summarized as follows:

  • To be eligible, organizations, including both for-profit and non-profits, had to be in operation on February 15, 2020 and had to have paid employee salaries and payroll taxes as reported in payroll tax filings to the IRS or paid independent contractors as reported on Form 1099-MISC.
  • During the “covered period” February 15, 2020, to June 30, 2020, qualifying organizations are eligible to receive a covered loan if the organization employs not more than the greater of:
    • 500 employees; or if applicable.
    • The size standard in the number of employees established by the Administration for the industry in which the organization operates.
    • Beginning on February 15, 2020, and ending on June 30, 2020, the maximum loan amount is the lesser of:
      • The average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5.
      • Plus, the outstanding loan amounts that were made beginning on January 31, 2020, and ending on the date you receive this loan, eligible to be refinanced under this loan; or $10,000,000.
  • During the covered period, the eligible recipient may use the proceeds of the covered loan for:
    • Payroll costs.
    • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
    • Employee salaries, commission, or similar compensations.
    • Payments of interest on any mortgage obligation.
    • Rent (including rent under a lease agreement).
    • Utilities.
    • Interest on any other debt obligation that was incurred before the period.
  • A deferral period exists for at least 6 months, but not more than 1 year, in relation to the payment of principal, interest, and fees.
  • Covered loans will not bear an interest rate that exceeds 4% and will have a maximum maturity of 10 years.
  • An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period (8-week period beginning on the date of the origination of a covered loan):
    • Payroll costs.
    • Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
    • Any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower is a mortgage on real or personal property and was incurred before February 15, 2020.
    • Any payment on any covered rent obligation.
    • Rent obligated under a leasing agreement in force before February 15, 2020.
    • Any covered utility payment.
    • Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or interest access for which service began before February 15, 2020.
  • The amount of loan forgiveness shall be reduced, but not increased, by multiplying the original loan amount by the quotient obtained by dividing:
    • The average number of monthly full-time equivalent employees employed by the eligible recipient during the 8-week period beginning on the date of covered loan origination.
    • By the average number of monthly full-time equivalent employees employed by the eligible recipient during the period beginning on February 15, 2019, and ending on June 30, 2019; OR the average number of monthly full-time equivalent employees employed by the eligible recipient during the period beginning on January 1, 2020, and ending on February 29, 2020.

It is important to note that the amount of loan forgiveness will be determined without regard to the employee reduction noted above if no later than June 30, 2020 the employer has eliminated the employee reduction that occurred in the period between February 15, 2020, and April 26, 2020.

This program provides an extraordinary opportunity for eligible organizations to obtain funds to allow it to continue to provide salaries and wages to its workforce during these uncertain economic times.

We appreciate being your trusted business partner and advisor. If you have any questions, do not hesitate to reach out to our Healthcare and Tax-Exempt experts at The Bonadio Group.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.

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Written By

Mario Urso April 2020
Mario Urso
Senior Counsel

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