skip to main content

April 8, 2020

Stroock Special Bulletin

By: Alan M. Klinger, David W. Lowden, Kerry T. Cooperman

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Act”),[1] which provides $2.2 trillion in economic support to eligible businesses and nonprofit organizations through low-interest federal loans (and, in certain cases, loan forgiveness), tax relief, and other stimulus measures, is now in its first full week of implementation.  Despite a rocky start, with loan applicants facing uncertainty and delays in loan processing and banks struggling to process massive numbers of applications with limited regulatory guidance, the administration of the CARES Act is in better focus today than it was a week ago.  On April 2, 2020, the U.S. Small Business Administration (the “SBA”) published its final interim rule (the “Rule”) implementing the CARES Act’s Paycheck Protection Program (“PPP”) and, on April 3, the PPP went live.[2]  The other loan programs under the Act, the Economic Injury Disaster Loan (“EIDL”) program and federal loans for midsize and large organizations, are also up and running.

This article, an update of our article previously issued on March 30, 2020, summarizes the eligibility criteria, key benefits, and key issues for consideration for nonprofits under the CARES Act’s stimulus programs, with particular focus on the PPP.

I. The Paycheck Protection Program. The PPP is usually considered the most advantageous loan program in the CARES Act for smaller charities and veterans organizations.

Eligibility Criteria: Nonprofits are eligible if they (i) are charities “described in”[3] Section 501(c)(3) or veterans organizations described in Section 501(c)(19) of the Internal Revenue Code (the “Code”), (ii) were in operation (and paying employees or independent contractors) as of February 15, 2020, and (iii) have 500 or fewer employees (including full-time, part-time, and certain other employees).  Other types of nonprofit organizations, such as 501(c)(4) social welfare organizations and 501(c)(6) business leagues, are not eligible for PPP loans (but, as discussed below, may be eligible for other CARES Act loans).  Eligible PPP applicants must self-certify that (i) the requested loan is necessary due to current conditions; (ii) the loan will be used for permissible purposes; and (iii) the applicant is not receiving duplicative funds for the same uses from another source.  Unlike traditional SBA-administered loan programs, the PPP does not require applicants to pledge collateral or provide a personal guarantee.

Loan Terms: An eligible nonprofit may apply for a loan, at an interest rate of 1% per year,[4] for the lesser of $10 million or two-and-a-half times its average total monthly payroll costs from the prior year (which does not include compensation for independent contractors).[5]  In calculating its historical average monthly payroll, a nonprofit cannot count, among other things, (i) the portion of any employee’s annualized salary that exceeds $100,000, (ii) compensation for employees whose “principal place of residence” is outside the United States,[6] (iii) certain federal employment taxes, and (iv) qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act.[7]  Repayment of principal, interest, and fees is deferred for at least six months (with the interest continuing to accrue during the deferral period), principal repayment is due in two years, and there is no prepayment penalty.  Nonprofits may not apply for a PPP loan more than once and, accordingly, are encouraged to apply for the maximum permissible loan amount.[8]

Permissible Use of Loans: PPP loans may be used for payroll (including paid leave), health-insurance premiums, retirement benefits, mortgage interest payments, rent, utility costs, and interest on other debt obligations.[9]

Loan Forgiveness: Subject to certain limitations, the full principal amount of a PPP loan is eligible for forgiveness to the extent it is used during the eight-week period starting on the loan origination date for (i) payroll costs (not to exceed $100,000 of annualized compensation per employee), (ii) interest on mortgage obligations originated before February 15, 2020, (iii) rent obligations under a leasing agreement in force before February 15, 2020, or (iv) utility payments (gas, water, transportation, telephone, or internet access).  Note, however, that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.  The amount of loan forgiveness is subject to reduction to the extent the borrowing nonprofit has laid off employees, or reduced the compensation of employees by more than 25%, on or after February 15, 2020.  (However, reductions of salaries of employees paid more than $100,000 to an amount equal to or in excess of $100,000 does not result in any reduction of loan forgiveness – in other words, the pay of senior staff can be reduced to $100,000 without adverse impact.)  The Act sets out alternative formulas for this determination.  A nonprofit is eligible for relief from loan-forgiveness-reduction penalties if it rehires the laid off employees, or restores their compensation to required levels, by June 30, 2020.  Specifically, a nonprofit that reduced its workforce or salaries between February 15, 2020 and April 26, 2020 will not be subject to any penalty with respect to loan forgiveness if such reductions are eliminated by June 30, 2020.[10]

An application for loan forgiveness should be made to the lender that is servicing the loan.  Supporting documentation will likely include verification of, among other things, the number of employees on the payroll, pay rates, and payments on eligible mortgage, lease, and utility obligations.  The nonprofit will need to certify, among other things, that it used the forgiveness amount to keep employees and to make eligible mortgage interest, rent, and utility payments.  The lender must make a decision on the forgiveness within 60 days.[11]

II. The Economic Injury Disaster Loan (EIDL) Program. This program is appropriate for most nonprofits that are not charities or veterans organizations.

Eligibility Criteria: “Private nonprofit organizations” that were in existence as of January 31, 2020 are eligible for EIDL loans under the CARES Act.  The term “private nonprofit organization” is defined in federal regulations as requiring (i) an IRS determination letter stating that the organization is organized under Section 501(c), (d), or (e) of the Code, or (ii) satisfactory evidence from the applicable state that the applying organization is a “non-revenue producing”[12] nonprofit “organization or entity” that is “organized or doing business under State law.”[13]  While this standard is broad, some nonprofits that self-declare their tax-exempt status (g., certain churches, social welfare organizations, unions, and business leagues) may lack an IRS determination letter, and nonprofits that are unincorporated associations (e.g., many labor unions) may also lack state-issued evidence of nonprofit status.  Nonprofits applying for EIDL loans up to $200,000 need not provide personal guarantees or proof that they can obtain credit elsewhere.

Loan Terms: Eligible nonprofits may apply for a loan of up to $2 million at a 2.75% interest rate.  Actual loan amounts will be based on the amount of economic injury sustained.  The repayment term will be determined by the nonprofit’s ability to repay the loan.[14]  Payments of principal and interest may be deferred for up to four years.[15]

Permissible Use of Loans: EIDL loans may be used for payroll, accounts payable, and other debts that otherwise cannot be paid due to the impact of COVID-19.

No Loan Forgiveness: Loan forgiveness is not available under the EIDL program.  But applicants can receive checks for up to $10,000 within three days of applying for an EIDL loan, and need not repay the $10,000 even if their application is denied.[16]

III. Federal Loans to Midsize/Large Organizations. This program, often referred to as the Industry Stabilization Fund, is most appropriate for larger organizations not eligible for participation in the PPP or EIDL programs.

Eligibility Criteria: “Nonprofit organizations” with between 500 and 10,000 employees (“Midsize/Large Nonprofits”) are also eligible for federal loans under the CARES Act (the “Midsize Loan Program”).  While “nonprofit organization” is not defined in the Act for purposes of the Midsize Loan Program, absent SBA guidance, it is assumed that it encompasses all entities that are nonprofit, except as otherwise excluded.  An eligible nonprofit must make a good-faith certification that, among other things, (i) the loan is necessary to support the nonprofit’s ongoing operations, (ii) the nonprofit will use the funds to retain or restore at least 90% of its workforce that was in place on February 1, 2020 at full compensation and benefits until at least September 30, 2020, (iii) the nonprofit will not outsource or offshore jobs for a specified time period, and (iv) the nonprofit will not abrogate collective bargaining agreements and will remain neutral in union organizing efforts.[17]

Loan Terms: The CARES Act does not specify a limit on the loan amount for which Midsize/Large Nonprofits may apply.  The interest rate will not exceed 2% per year.  Repayment terms should be discussed with your bank or other lender, but the duration of the loan may be as long as five years.

No Loan Forgiveness: Loan forgiveness is not available to Midsize/Large Nonprofits under the Midsize Loan Program. However, there are no payments due or accrual of interest for the first six months.

IV. Expansion of Tax Deductions for Charitable Contributions 

Expanded Tax Deductions for Individual Donors: Individuals who elect to take the standard deduction may further deduct up to $300 for cash contributions to certain qualifying charities for the 2020 tax year.[18]  Subject to certain limitations, the cap on the deductibility of annual charitable cash giving by individuals who itemize their taxes is increased to 100% of adjusted gross income.[19]

Expanded Tax Deductions for Corporate Donors: The cap on the deductibility of annual charitable giving by corporations is increased from 10% to 25% of taxable income.  The cap on deductibility of food donations by corporations is increased from 15% to 25% of taxable income.[20]

V. Employee Retention Payroll Tax Credit

Nonprofit organizations that (i) were an ongoing concern at the beginning of 2020, (ii) experienced a reduction in gross receipts of at least 50% in the first quarter of 2020 compared with the first quarter of 2019 or had their operations suspended (in whole or in part) during the calendar quarter due to governmental orders restricting commerce or travel due to COVID-19, and (iii) are not receiving loans under the PPP, are eligible for a refundable payroll tax credit of up to $5,000 for each employee on the payroll. In calculating the decline in revenue for this purpose, the nonprofit’s whole operations must be taken into account.  This tax credit is available on an ongoing basis until the nonprofit’s revenue for a quarter exceeds 80% of its revenue from the same quarter in the previous year.[21]

VI. Reimbursement of Self-Funded Unemployment Benefit Payments

Nonprofit organizations that self-fund unemployment benefits are eligible for reimbursement of up to one-half the cost of benefits provided to employees who were laid off.[22]

VII. Availability of CARES Act Loans to Churches and Other Religious Organizations

Churches and other religious organizations are eligible for PPP and EIDL loans. Questions had been raised as to their eligibility under the First Amendment’s “Establishment Clause.”  And an existing SBA regulation bars loans to “businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting.”[23]  However, the SBA issued an FAQ on April 3, 2020 stating the view that loans to churches are permitted, notwithstanding these “church and state” issues.[24]

VIII. Other Guidance for Nonprofit Organizations

Application Procedures: We expect loan applications to be acted upon by lenders on a first-come, first-served basis.[25]  Because the amount of funding for CARES Act loan programs was established based in part on expectations of demand, there can be no assurance that loan funds will not be exhausted.  We therefore recommend that nonprofits who may wish to apply for a loan do so as soon as practicable.

PPP loans are issued by SBA-approved banks and other financial institutions, of which there are currently approximately 1,600.  Generally, a nonprofit should seek a PPP loan from its regular bank, if the bank is an SBA-approved lender.[26]  While the PPP application is short,[27] each bank will likely request additional information, and that information will vary from bank to bank.  Banks will likely require copies of certain governance documents (e.g., certificate of incorporation and by-laws), tax returns and/or financial statements, and evidence of payroll (possibly including tax filings).  Some banks may impose other limitations on their loan-processing programs, such as only processing applications from customers with credit lines or only processing applications above a threshold loan amount (e.g., $50,000).  Note that applicants will be required to certify, among other things, that “to the extent feasible,” they will purchase only American-made equipment and products.

EIDL loans are administered by the SBA, and application instructions can be found here:  Loans under the Midsize Loan Program will be administered by local financial institutions, which will have access to a special U.S. Federal Reserve facility that provides the financing.

Affiliate Aggregation Rules in Counting Employees: In counting employees for purposes of assessing eligibility under the PPP and other CARES Act loans, nonprofits that have affiliated entities may be required to include the employees of the affiliates in their count.  On April 3, 2020, the SBA issued guidance—“Affiliation Rules Applicable to U.S. Small Business Administration Paycheck Protection Program”—summarizing the applicable affiliate tests under the PPP.[28]  Nonprofits whose total number of employees, counting employees of affiliates, approach the applicable eligibility threshold should carefully review the governing affiliate aggregate rules.

Applying for Both CARES Act Loans and Other Government Grants: Generally, while organizations are permitted to apply for both PPP loans and loans under other CARES Act programs, different loans may not be used for the same purpose.  However, we do not anticipate that receipt of a PPP or other CARES Act loan would preclude a loan recipient from receiving other government grants (g., NEA or NEH grants), which are usually restricted for use by specified government-approved programs in the future.

Seeking Board or Executive Committee Consent: Nonprofits should ensure that, in applying for loans or other relief under the CARES Act (or other federal, state, or municipal relief programs), they comply with the substantive and procedural requirements under law, their by-laws, and other governance documents.  The nonprofit’s governing board, or executive committee, should approve the loan.  Unless otherwise specified in the governance documents, this may be done prior to submission of the application or prior to receipt of the loan funds.

Assessing the Need for Third-Party Consents: A nonprofit with existing loans or other financial commitments should examine the underlying documents to determine whether they contain covenants restricting or limiting the nonprofit’s ability to incur additional debt.  If such covenants exist, third-party consent may be needed prior to obtaining a loan under the CARES Act.

Thousands of nonprofit organizations across the country continue to face significant obstacles in deciphering the scope of economic relief available to them under the CARES Act, making meaningful contact with their lenders, and preparing and submitting loan applications.  We understand that, for many nonprofits, those obstacles are compounded by a cascade of other fundraising, operational, and business challenges caused by the COVID-19 crisis.  We expect that, in the coming weeks, the SBA and Treasury Department will issue further guidance with respect to implementation of the CARES Act; that banks will improve their loan-processing systems and procedures; and that the overall administration of the CARES Act loan programs will improve with time.  We also believe that additional economic stimulus measures benefiting nonprofits may subsequently be enacted at the federal level or expanded to currently ineligible types of nonprofits and, in certain states, at the state and municipal levels as well.  Nonprofits that may be eligible for relief under federal, state, or municipal programs are encouraged to stay closely abreast of regulatory and legislative developments.


For More Information:

Alan M. Klinger

David W. Lowden

Kerry T. Cooperman

Lee C. Rarrick

[1]  The text of the CARES Act is available here: (last visited April 7, 2020).

[2]  The text of the Rule is available here: (last visited April 7, 2020).

[3]  According to Section 508(a) of the Code, subject to a few exceptions in Section 508(c), an organization is not treated as “an organization described in section 501(c)(3)” unless it has filed for tax-exempt status.  Note that the organization does not need to have received a requested IRS determination letter.

[4]  Note that some early guidance indicated that this rate would be 0.5%.

[5]  Independent contractors of nonprofit organizations may independently apply for a PPP loan if they meet the eligibility criteria.  See Rule, at III(2)(h).

[6]  It is unclear whether an employee’s “principal place of residence” will be construed to mean only the country where an employee presently lives (even if he or she has a home in the U.S. and pays U.S. taxes), or whether it will also be construed to mean such employee’s U.S. domicile (if any).  This will be an issue for U.S.-formed nonprofits with some employees temporarily overseas.

[7]  See Rule, at III(2)(g).

[8]  See CARES Act Tit. I § 1102 (Paycheck Protection Program).

[9]  Payroll costs include “compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.”  See Rule, at III(2)(f).

[10]  See CARES Act Tit. I § 1106 (Loan Forgiveness).

[11]  See (last visited April 7, 2020).

[12]  This language is quizzical.  All nonprofits produce revenue; we assume that the authors of this provision mean taxable income or something comparable.

[13]  See 13 C.F.R. § 123.300, available at (last visited April 7, 2020).

[14]  See (last visited April 7, 2020).

[15]  See 15 U.S.C. § 636(f).

[16]  See CARES Act Tit. I § 1110 (Emergency EIDL Grants); see also (last visited April 7, 2020).

[17]  See CARES Act Tit. IV § 4003 (Emergency Relief and Taxpayer Protections).

[18]  See CARES Act Tit. II § 2204 (Allowance of Partial Above the Line Deduction for Charitable Contributions).

[19]  See CARES Act Tit. II § 2205 (Modification of Limitations on Charitable Contributions During 2020).

[20]  Id.

[21]  See CARES Act Tit. II § 2301 (Employee Retention Credit for Employers Subject to Closure Due to COVID-19).

[22]  See CARES Act Tit. II § 2103 (Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations).

[23]  See 13 C.F.R § 120.11(k); see also (last visited April 7, 2020).

[24]  See (last visited April 7, 2020); see also the draft interim final rule available at (last visited April 7, 2020) (stating that the normal SBA affiliation rules will not apply to related religious entities where the application of such rules would substantially burden those organization’s religious exercise).

[25]  See Rule III(2)(m) (providing that the PPP will be administered on a “first-come, first-served” basis).

[26]  If the bank is not SBA-approved, or if the nonprofit does not have a bank, a list of New York SBA lenders is available here: (last visited April 7, 2020).

[27]  See (last visited April 7, 2020) (containing the SBA form for the PPP loan application, which banks and other lending institutions will use in addition to their own requirements).  Note that the SBA form references the refinancing of EIDL in the box where the amount to be borrowed is noted; nonprofits may disregard such reference since they were previously barred from obtaining such loans.  The form also asks for the names of owners; this is inapplicable to nonprofits and therefore should be marked as “not applicable.”  Note also that some banks’ online application forms may have similar questions that are inapplicable to nonprofits which may have to be answered in order to move to the next question.  Seek the bank’s advice as to how best to handle this problem.

[28]  See (last visited April 7, 2020).


This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.