On Thursday night (April 2, 2020), the Small Business Administration issued an Interim Final Rule with additional guidance on how the SBA will administer the Payroll Protection Program (PPP). This Interim Final Rule provides guidance on 3 keys issues, as follows:
#1 Religious Liberty
The text of the The Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) is fairly straightforward when it comes to conditions for participants in the PPP. Borrowers must have fewer that 500 employees, must have been in operation February 15, 2020, and must have paid salaries and payroll taxes for employees or paid independent contractors. Further, the legislative intent of Congress in passing the CARES Act was clear: the Act was intended to expand the SBA’s Section 7(a) loan program to allow churches and nonprofits to participate without violating their religious convictions.
That is why observers and attorneys (including this one) were a bit surprised when the Borrower Application Form produced by the SBA for the Payroll Protection Program included this language in the instruction section (page 4): “Civil Rights (13 C.F.R. 112, 113, 117) – All businesses receiving SBA financial assistance must agree not to discriminate in any business practice, including employment practices and services to the public on the basis of categories cited in 13 C.F.R., Parts 112, 113, and 117 of SBA Regulations. All borrowers must display the “Equal Employment Opportunity Poster” prescribed by SBA.” These provisions would arguably require applicants to comply with (1) Title VI of the Civil Rights Act of 1964 (prohibiting discrimination on the basis of race, color or national origin); (2) additional laws prohibiting discrimination on the basis of religion, sex, marital status and handicap status; (3) Title IX of the Civil Rights Act of 1964 (prohibiting discrimination on the basis of sex; note that the Obama Administration extended this definition to include “gender identity,” the Trump Administration reversed this decision and the issue is pending before the Supreme Court); and (4) a law prohibiting discrimination on the basis of age. Though Title VI and Title IX include religious exemptions, this Civil Rights provision raised questions about how those exemptions would apply to PPP applicants.
Fortunately, the Interim Final Rule clarifies this. Here’s the text of that clarification: “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 C.F.R. 113.3-1h, which provides: ‘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.”
Though this section addresses the primary religious liberty concerns related to churches and most ministries, it does not address one concern especially relevant to Christian schools: whether or not a participant in the PPP will be considered a “recipient of federal funds.” This leaves two options for Christian school and ministries that are still concerned about religious liberty: (1) wait and see (the SBA has promised additional guidance) or (2) apply and see (the loan could always be declined or the final loan documents rejected if concerns are not addressed).
#2 Independent Contractors
The text of the CARES Act appeared to allow participants to include payments to independent contractors in “payroll costs.” However, the Interim Final Rule includes this question and answer on Page 11:
“Do independent contractors count as employees for purposes of PPP loan calculations? No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.“
In short, ministries should not include payments to independent contractors in their calculation of “payroll costs.” Rather, they should encourage independent contractors to file their own application for relief.
#3 Loan Forgiveness, Term and Interest Rate
The Interim Final Rule confirms guidance issued earlier this week about PPP loan forgiveness. PPP loans will be forgiven if the loan amounts are used to pay payroll costs, mortgage interest and prior debt obligations (predating February 15, 2020), rent from lease agreements predating February 15, 2020, and utilities from service agreements predating February 15, 2020 in the eight weeks following the date of the loan. However, the Interim Final Rule also confirms that (to qualify for 100% loan forgiveness) at least 75% of the loan amount must be used to pay payroll costs and no more than 25% of the loan amount may be used to pay mortgage interest, debt interest, rent or utilities.
Further, if your ministry is concerned about the “recipient of federal funds” argument, some legal groups are recommending that PPP funds only be used for payroll costs and that ministries avoid using these funds for anything related to personal or real property. Why? SBA regulations indicate that federal assistance rules only apply for the life of the loan; however, if PPP dollars are used for real property, an argument could be made that these rules would apply for the life of the building.
Also, the Interim Final Rule clarifies that the term of a PPP loan is 2 years and that the current interest rate is 1%.
One more thing. This Rule also confirms that the PPP is a first come, first serve program. If you are considering participating in the PPP, the SBA is encouraging small businesses and ministries to apply as soon as possible.
As evidenced by this post, the SBA is moving quickly to explain and implement the PPP. The above explanation is subject to change along with SBA guidance and the practices of implementing financial institutions, and I will post important updates here.
This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is being provided to church and ministry leaders with the understanding that The Good Citizen Project is not engaged in rendering legal, accounting, tax, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Laws vary by jurisdiction, and the specific application of laws to particular facts requires the advice of an attorney.