On June 3, 2020, the Senate passed H.R. 7010, Paycheck Protection Program Flexibility Act of 2020, which President Trump signed into law on June 5. The Paycheck Protection Program (PPP), as established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has created roughly $659 billion in loans, mostly for small and medium-sized employers, including hundreds of thousands of nonprofit organizations. H.R. 7010 provides more guidance and clarity in terms of how employers can apply for PPP loan forgiveness. Below is a very brief overview of certain highlights for nonprofit organizations (excluding some minor changes in the bill).
There will be a new SBA Form 3508 Application, Schedule A, Worksheet, and related instructions. This packet will be available on the SBA website, and we will also make it available here on the Altruic Advisors website.
Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the period at eight weeks.
The minimum amount required to be paid for personnel costs dropped from 75% to 60%; if your personnel costs are under 60%, none of the loan will be forgiven. (Senators Collins and Rubio indicated this could revert back to a sliding scale with future technical changes.)
The new bill clarifies that payments to furloughed employees during the covered period are eligible for loan forgiveness.
For purposes of measuring full-time equivalent (FTE) employees, a full-time equivalent employee means an employee who works 40 hours or more per week. (Your Executive Directors working 60 hours/week still count as 1.0 FTE, not 1.5 FTE.)
Nonpayroll costs are eligible for loan forgiveness if they were either paid during the covered period or were accrued during the covered period and paid on or before the next regular billing date.
Two new exceptions to the FTE reduction rules allow for loan forgiveness even if the workforce isn’t fully restored:
Loan forgiveness must be requested within ten months after the last day of the eight-week covered period. With this, the six-month deferral period to begin repayment on the loan is eliminated and is replaced with the ten-month request period.
PPP borrowers can now also defer payment on the employer share of FICA taxes. (This is probably a bad idea - avoid taking this route if you can help it.)
For any amounts not forgiven, the loan maturity date on new loans is extended from two years to five years. Future technical changes may help make this provision retroactive to all PPP loans.
What Is Still Not Mentioned In The New Bill
Can nonprofits use PPP funds as a match for other federal grants?
The current text of the Uniform Guidance (2 CFR § 200.306) for federal awards states that, generally, funds from another Federal award cannot be used as match funds. In April 2020, the U.S Department of Justice’s Office for Victims of Crime (“OVC”) issued an FAQ on this topic that addresses this section of the Uniform Guidance. Within their FAQ, they state: “Using funds from a private loan (whether forgiven or not) is essentially a subrecipient’s commitment of its own funds. Although the PPP loan is a federally guaranteed loan, OVC does not consider this loan (even if forgiven) to be funds paid by the Federal Government under another Federal award for purposes of match . . .thus, such funds would be a permissible source of match for VOCA funded projects”. Again, keep in mind that this match still needs to be for qualified costs under the PPP loan (such as salaries or rent).
Can nonprofits double-dip with grant funds earmarked to cover certain costs, including personnel costs?
For non-federal awards, you’ll need to check with the grantor to ask if expenses applied against a PPP loan that was subsequently forgiven can also be applied against the grant.
For federal awards, it seems likely that allocating the same costs to a forgiven PPP loan and to another federal grant would be considered duplicated costs and, therefore, an improper payment under 2 C.F.R. § 200.53. If the PPP loan is paid back, the costs would not be considered to have been duplicated. Remember that federal grants generally restrict the amount of administrative costs you can apply against the grants. With PPP loan funds, there is no such restriction on administrative costs, notwithstanding the $100,000 annualized limit per employee, etc.
What is required in the tracing of actual PPP proceeds to expenditures?
Again, there is no specific guidance on this with the new legislation. However, you’ll want to remember that it’s your lender who will decide whether or not to recommend to the SBA that your loan be forgiven. Since the lender receives a processing fee with each loan, they have some skin in the game. If the SBA determines that your lender recommended loan forgiveness when they shouldn’t have, they’ll lose their fee. All that to say that you’ll want to make the audit trail is very easy for your lender to follow. We recommend that you keep your PPP amounts in a separate bank account and transfer amounts as needed for net payroll, payroll taxes, rent, utilities, etc. The amount of each transfer should be the exact amount of the corresponding expense - to the penny! Instead of using a separate bank account, you can also employ code tracking within your accounting software, such as class tracking in QuickBooks Online so that you can run an expense report for that particular code or class. Make it easy for your lender to follow the trail or you’ll run the risk of losing forgiveness. Lenders will be very busy processing these applications and they won’t have time to track down a mess.
Two New Safe Harbor Provisions That Help Avoid FTE Reduction
Employee refuses offer of reinstatement
Employees whom the borrower offered to rehire (but the former employee declined the offer) are generally exempt from the FTE reduction calculation. The same is also true if the employer cannot find qualified employees or the employer currently has employees who had their hours reduced and the following is true:
the borrower made a good faith, written offer to restore the employee’s hours and the employee refused
the offer was for the same salary or hourly rate and for the same number of hours as was earned by the employee in the pay period just prior to the reduction in hours
the offer was rejected by the employee
the employer has maintained the records documenting the offer and its rejection
Inability to restore business operations
If the employer has not been able to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions, the employer will be able to remove the FTE reduction in the loan forgiveness calculation. With this particular item, we’ll likely need a bit more guidance to fully understand where the line is drawn that determines business operations were not restored to February 15 levels. Perhaps lenders will review recent support and revenue figures compared to February 15 levels.
As you near the end of your covered period, we wish you lots of luck in applying for PPP loan forgiveness. If you take your time and very carefully follow the updated instructions that will be released this next week, you should have a good chance of success.