CARES Act Benefits for Nonprofit CAAs

Considerations for CAAs


Nonprofit CAAs and other members of the Community Action network are not precluded from applying for PPP or EIDL loans merely because they are recipients of federal funding. However, CAAs and other network organizations must carefully consider: (1) whether they meet the economic necessity criteria required to apply for each loan; and (2) the process involved to shift the uses of the organization’s existing funding to other allowable program objectives, if applicable.

Economic Necessity***

With respect to PPP and EIDL loans, unlike other loans from the SBA, the CARES Act waives the requirement that borrowers are unable to obtain credit from any other non-SBA source. Known as the “credit elsewhere” requirement, this provision is usually meant to ensure that the SBA is a lender of last resort. Instead, for PPP loans, the applicant is required to certify that the loan is necessary to support the ongoing operations of the organization due to the current economic uncertainty. For EIDLs, the applicant must demonstrate a substantial economic injury.

SBA is also using Loan Necessity Questionnaires as part of its PPP loan review process for loans with an original principal amount of $2 million or greater. The forms are designed to help SBA loan reviewers evaluate the borrower’s good faith certification. A borrower should not assume that the SBA is questioning their certification by sending them a form. SBA has stated that its determination “will be based on the totality of [the borrower’s] circumstances.” However, a borrower’s failure to complete the form and provide supporting documentation may result in the SBA’s determination that the borrower was “ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed.” Furthermore, failure to complete the form may result in the SBA seeking repayment of the loan or pursuing “other available remedies.”

When considering taking out a CARES Act loan, nonprofit Community Action organizations must consider their current financial condition, including the availability of existing federal funds and the impact of the COVID-19 outbreak on the organization’s operations and programs, to determine whether they can make the certifications required for the PPP or EIDL loans in good faith.

For example, programs that have ceased all operations due to concerns about staff and client COVID-19 exposure will likely be able to certify that these loans are necessary. While some CAAs have enacted emergency closure policies to continue paying staff during the closure, paid leave benefits under these policies may expire before the outbreak ends, so an organization may determine, at that point in time, that a PPP or EIDL loan is necessary to maintain payroll and full employment.

Further, many state and regional Community Action associations may have suffered financial losses as a result of disruptions to planned conferences, meetings, and other events. These costs may include cancellation fees, penalties for changing travel plans, as well as the loss of expected revenue. These organizations may determine that the PPP or EIDL loan is necessary to maintain payroll and cover ongoing operational costs.

Shifting Uses of Existing Federal Funds***

Many CAAs and other network organizations have maintained essential operations and continue to cover payroll and operational costs using federal funds. If the organization seeks to redirect its existing federal funds to different activities because it receives a PPP or EIDL loan, it must document the reason for doing so and ensure that the reallocation of federal funds continues to meet the purposes of the federal award. For example, an organization may identify specific needs directly connected to the COVID-19 outbreak that the organization would otherwise be unable to meet.

For a CAA subject to the Uniform Guidance, 2 C.F.R. § 200.308(c)(1)(i), if it makes adjustments to its program activities as a result of receiving PPP or EIDL loan proceeds, it must seek prior approval for changes in each applicable award’s project scope and objectives. For block grants such as CSBG and LIHEAP, states may have their own requirements with respect to these types of modifications.

Finally, while it seems obvious, organizations must not charge any payroll, mortgage interest, rent, utility payments, or other costs covered by PPP or EIDL loan proceeds to any other award, federal or non-federal.

Scheduled Layoffs***

CAAs that have scheduled layoffs, such as layoffs of Head Start staff during the summer months, may be impacted by the PPP loan forgiveness rules. Under the PPP, loan forgiveness is reduced if the employer’s full-time employee headcount decreases compared to a prior period, regardless of the reason for the layoff or whether it was previously scheduled.

To calculate the total forgivable portion of a PPP loan if the CAA reduces its workforce, the CAA would calculate the amount of the loan spent on qualifying costs during the covered period after the loan is made. Then, the CAA would multiply this amount by a fraction—obtained by dividing:

1. The average number of full-time equivalent employees per month employed by the CAA during the covered period

by, either:

2. The average number of full-time equivalent employees per month employed by the CAA between February 15, 2019 and June 30, 2019


3. The average number of full-time equivalent employees per month employed by the CAA between January 1, 2020 and February 29, 2020

The “average number of full-time equivalent employees” is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month. The CAA can choose whichever calculation results in the smallest reduction in the forgivable amount. A reduction in the forgivable amount may also be avoidable if the CAA is able to restore laid off teachers by the end of the covered period.

The forgivable portion of a PPP loan is also reduced if the CAA reduces the total salary or wages of any employee who earns less than $100,000 per year by more than 25% as compared to the employee’s earnings in the last full quarter prior to receiving the PPP loan.

***Updated April 23, 2021

This resource is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Grant Award Number 90ET0467-03. Any opinion, findings, conclusions, or recommendations expressed in these materials are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.