What Do They Mean for Not-for-Profit Organizations?
Overview
The Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security (‘‘CARES”) Act contain a significant number of provisions that impact nonprofit organizations. This summary is meant to highlight the provisions in these new pieces of legislation that specifically affect nonprofits so you can determine what may be applicable or of benefit to your organization.
Please be aware that some relief is mutually exclusive so that if you avail yourself of one option (such as a loan), you may become ineligible for another option (such as payroll tax credits). Additionally, there are some programs that are available to specific types of nonprofits and unavailable to others. This summary attempts to clarify eligibility as we understand it at this time.
Relief Loans/Grants Applicable to Nonprofits
Paycheck Protection Program Loans
The CARES Act authorizes the Small Business Administration (“SBA”) to provide Paycheck Protection Program (“PPP”) loans up to $10 million. Actual loan amounts are based on eight weeks of prior average payroll plus an additional 25 percent. These loans come with the potential for partial loan forgiveness based on retaining employees and spending funds on wages and qualifying expenses. Eligible nonprofits include section 501(c)(3) organizations with up to 500 employees. Churches and their integrated auxiliaries (e.g. schools or mission societies) are described in section 501(c)(3) regardless of whether they voluntarily apply with the IRS for recognition of such status and are therefore included. Until further guidance is provided, it appears that business leagues (i.e. “trade associations”) exempt under section 501(c)(6) and social clubs exempt under section 501(c)(7) would not be eligible for PPP loans.
SBA Economic Injury Disaster Loan Program
The CARES Act facilitates the Economic Injury Disaster Loan (“EIDL”) Program which grants up to $10,000 and loans up to $2 million for private nonprofits without regard to number of employees. The SBA’s application for the EIDL program identifies private nonprofits as non-governmental entities that currently have an effective ruling letter from the IRS granting exempt status under section 501(c), (d), or (e) OR satisfactory evidence from the state that the non-revenue producing organization is a non-profit one organized or doing business under state law, OR a faith-based organization.
The SBA definition of private nonprofit appearing in the US Code of Regulations 44 §206.221(f) mirrors the application except it doesn’t include “or a faith-based organization.” For churches and integrated auxiliaries that don’t have an IRS exemption determination letter, it was initially unclear whether they would still be included in the definition of private nonprofit based on having “satisfactory evidence from the state” regarding their nonprofit status or as a “faith-based organization.” On April 3, the SBA issued a list of FAQs regarding the participation of faith-based organizations in the PPP and EIDL programs which clarified that such organizations are eligible to receive SBA loans regardless of whether they provide secular social services or have an IRS determination letter. The FAQs can be viewed here. This program is potentially available to many more types of organizations than the PPP since the EIDL program covers all private organizations exempt under section 501(c), including, for example, business leagues exempt under section 501(c)(6) and social clubs exempt under section 501(c)(7). Please click on the link for more details on this provision.
Exchange Stabilization Fund
The CARES Act provides $500 billion to the Exchange Stabilization Fund to provide loans, loan guarantees, and other investments for emergency relief. There is intent to implement a special facility through the Federal Reserve targeted specifically at nonprofit organizations between 500 and 10,000 employees to encourage such organizations to retain at least 90 percent of their workforce through September 30, 2020, along with some other requirements. Significant details are not yet available regarding this program as it is still being developed.
Provisions Applicable to Employers
Employee Retention Credit
Qualified tax-exempt organizations that do not avail themselves of the CARES Act SBA forgivable loans under the Payroll Protection Program can claim a refundable payroll tax credit for up to 50 percent of qualified wages paid after March 12, 2020, and before January 1, 2021. The creditable wages are limited to $10,000 per employee, resulting in a maximum credit of $5,000.
Wages include compensation paid to employees and health care costs paid for these workers. Businesses and tax-exempt organizations can take advantage of this credit if their operations were suspended or partially suspended due to government orders limiting commerce, travel or group meetings due to COVID-19. In addition, businesses that had gross receipts during a quarter in 2020 that were less than 50 percent of gross receipts for the same quarter in 2019 can claim the credit for each quarter until the quarter following the quarter in which gross receipts are more than 80 percent of gross receipts for the same quarter in 2019. The credit is not available to governments. Please click on the link for more details on this provision. Additional guidance from the IRS can also be reviewed here.
Deferral of Employer Payroll Taxes
The due date for the employer share of employment taxes on OASDI wages (6.2 percent of wages up to $137,700 for 2020) due on or after March 27, 2020, and before January 1, 2021, may be deferred. One-half of these taxes will be due in 2021, and the other half will be due in 2022. Although this program does not involve tax credits or forgiveness, it can help with cash flows for those organizations that have large payroll obligations and short-term liquidity needs. The payroll tax deferral is not available when an employer receives a PPP loan. The employee retention credit may be paired with this payroll tax deferral. Please click on the link for more details on this provision.
Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations
The CARES Act provides for payment to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020, to pay unemployment benefits. Nonprofits typically fall into one of three categories for state unemployment purposes:
- Some charitable nonprofits pay state unemployment taxes (“SUTA”) like other businesses.
- Charitable nonprofits have the option of electing to “self-insure” rather than paying SUTA. Nonprofits that elect this option are required to reimburse their state unemployment insurance trust funds for the amount of benefits their terminated or laid off employees claim.
- Some nonprofits are exempt from unemployment laws. These include churches and their affiliated organizations as well as nonprofits with less than four employees who work during 20 weeks of the year. Employees of such organizations are typically not eligible to receive unemployment insurance benefits if they lose their jobs.
Many states are taking steps to protect nonprofits that pay SUTA from having their SUTA tax rates increase due to unemployment claims related to COVID-19. However, such provisions would not protect self-insured nonprofits that are required to reimburse state trust funds based on actual claims made. Hopefully the funding provided under the CARES Act will help mitigate such costs.
Changes to Mandated Paid Leave
Because an individual must be employed to take advantage of the new mandated paid leave provisions under FFCRA, an employee who was laid off on March 1, 2020, or later and who worked for the employer at least 30 days of the 60 days prior to being laid off can be rehired and become eligible for the mandated leave. In addition, the Department of Labor has made clear that mandated paid FMLA is available even if an employee works a partial workweek. Please click on the link for more details on this provision.
Employer Payment of Employee Student Loans
After March 27, 2020, and before January 1, 2021, an employer can pay up to $5,250 of the principal and interest on an employee’s education loans without the amounts being taxable to the employee. Please click on the link for more details on this provision.
Provisions Applicable to Organizations with Unrelated Business Income
Changes to NOLS
The CARES Act changes the treatment of Net Operating Losses (“NOLs”) that are generated in tax years 2018, 2019, and 2020 to permit them to be carried back up to five years. This will allow for an immediate claim for refund for taxpayers who had taxable income during the carryback time period. Additionally, the limitation of only being able to offset 80 percent of taxable income has been removed for these years. Please click on the link for more details on this provision.
Provisions Applicable to Donors
Charitable Contribution Changes
The CARES Act provides an opportunity for individual taxpayers claiming the standard deduction to deduct $300 of cash charitable contributions from adjusted gross income. Please click on the link for more details on this provision.
For tax year 2020, the CARES Act modifies the usual limitations on deductions of charitable contributions by individuals and corporations. The CARES Act temporarily lifts the provision for individuals to 100 percent of adjusted gross income. Similarly, the CARES Act raises the 10 percent of income limit on deductions by corporations to 25 percent of income. Please click on the link for more details on this provision.
This is not a comprehensive review of any development or tax position. Do not rely on these brief summaries to take action without further reading into the underlying source documents and consultation into specific topics. It is not, and should not be construed as, accounting, legal, or written tax advice provided by Cherry Bekaert LLP to the reader. Your specific circumstances or needs, and other factors could affect the information contained herein. Please consult with your tax advisor before implementing any planning ideas or taking any actions based on discussion in this general explanation.
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