On March 27, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. This Alert discusses Paycheck Protection Loans, which will allow certain nonprofits with no more than 500 employees to borrow funds on favorable terms, and the related rules for forgiveness of some or all of the borrowed amount.

Our next Alert will cover other CARES Act provisions that may benefit nonprofits, including Economic Stabilization Fund loans to nonprofits with more than 500 employees, Economic Injury Disaster Loans, emergency grants, unemployment assistance, payroll tax deferral, and a payroll tax credit.

Paycheck Protection Loan Program1

  • Which nonprofits are eligible for this program? Organizations exempt under Internal Revenue Code sections 501(c)(3) and 501(c)(19)(veterans organizations), so long as they employ no more than 500 employees.2
  • How much can eligible nonprofits borrow? Up to 2.5 times their average monthly payroll amount for the preceding twelve months, capped at $10 million. Payroll costs include amounts paid to U.S.-resident employees (including salary, amounts paid for separation or dismissal, state and local taxes, and benefits) and amounts paid to independent contractors. Annual compensation in excess of $100,000 for any employee or contractor is excluded.
  • What types of certification are required? Principally, that as a result of current economic conditions the requested loan is needed to support ongoing operations and that the funds will be used to retain workers and maintain payroll or to make mortgage payments, lease payments, or utility payments. Applicants are not required to demonstrate that they cannot obtain credit elsewhere; nor is a personal guarantee of the loan amount required.
  • What can borrowed funds be used for? To pay for expenses included in the calculation of payroll costs (described above) plus certain group health benefits, mortgage interest, rent, and utilities.
  • What are terms of repayment? Loan payments are deferred for six to twelve months, and lenders cannot impose a prepayment penalty. (No payments will be due on amounts forgiven.) The maximum term is ten years, and the maximum allowable interest is 4 percent.
  • How does a nonprofit apply? Nonprofits can apply to Small Business Administration-approved lenders for Paycheck Protection Loans through June 30, 2020. The SBA will release instructions concerning applications and qualification by April 11, 2020.

Loan Forgiveness Program3

  • Can the entire Paycheck Protection Loan amount be forgiven? Yes, provided the nonprofit incurs sufficient qualifying expenses during the eight-week period following origination of the loan and satisfies employee retention and compensation requirements.
  • What is the maximum forgivable amount? The amount equal to payroll costs and certain health benefits and mortgage interest, rent, and utilities for obligations incurred before February 15, 2020 over the eight-week period following the loan origination date.4
  • What happens if a nonprofit releases employees or cuts compensation?
    • Reduction in employees. Generally, the amount of a Payroll Protection Loan that may be forgiven is reduced proportionally if the nonprofit employed fewer employees during the eight weeks following the loan origination date than it employed between either February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020 (at the borrower's election).
    • Impact of reduction in compensation. Generally, the amount forgiven will be reduced dollar for dollar by the amount by which compensation for any employee who earned less than $100,000 in 2019 is reduced below 75 percent of what that employee earned in the last full quarter prior to the loan origination date.
    • Exception. Nonprofits will be eligible for the maximum forgivable loan amount even with a reduction in employees or compensation if:
      • a reduction in full-time employees occurs between February 15, 2020 and April 26, 2020 (30 days after enactment of the CARES Act) and the reduction is eliminated no later than June 30, 2020; and
      • a reduction in salary or wages occurs between February 15, 2020 and April 26, 2020 and is eliminated no later than June 30, 2020.
  • How does a nonprofit apply to have a loan forgiven? The nonprofit will apply to the lender servicing the loan, and the lender must make a decision on loan forgiveness within 60 days of receiving the application.


1 CARES Act § 1102.

2 Both full-time and part-time employees of the nonprofit and its affiliated entities count in calculating the 500. Affiliation generally exists when one entity has the power to control another or a third entity controls both.

3 CARES Act § 1106.

4 In addition, the amount of any emergency grant (up to $10,000) received under the Economic Injury Disaster Loan program will be subtracted from the maximum forgivable loan amount. We will cover the EIDL program in our next alert.

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.