Impact of the CARES Act on Not-for-Profit Organizations
April 3, 2020 - On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”), a $2 trillion economic stimulus package intended to provide needed assistance to individuals, nonprofits, businesses, and state and local governments affected by the coronavirus.
Below is a brief overview of the provisions in the Act that impact not-for-profit organizations (“NFPs”).
Incentivizing Charitable Giving
With resources stretched to the limit charities have been sounding the alarm on the impact reduced donations will have on their ability to operate their programs. The Act encourages individuals to make charitable contributions by providing an above-the-line deduction (for all taxpayers who do not itemize their deductions) for cash contributions up to $300.
Moreover, the Act amends the limitations on deductions for certain cash contributions during 2020. For individuals, the 60% limitation of Adjusted Gross Income (“AGI”) is suspended, allowing individuals who itemize to take a charitable contribution deduction for up to 100% of their AGI. For corporations, the 10% limitation is increased to 25% of taxable income.
Contributions made to a supporting organization or a donor-advised fund do not qualify for either the above-the-line deduction or the increased limits.
The Act also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent of taxable income.
Loan and Funding Assistance
Paycheck Protection Program Loans (“PPP”) – the Small Business Administration (“SBA”) has been authorized to loan up to $349 billion
This program provides loans of up to $10 million for eligible NFPs, including churches, with fewer than 500 employees (full-time, part-time, or other basis, i.e., independent contractors). In order to be eligible for PPP Loans, NFPs needed to have been in business before February 15, 2020 and had paid employees or independent contractors. The loan is to be used for payroll, rent, health benefits, insurance premiums, utilities, and interest on other debts or mortgages that were incurred before February 15, 2020. The Act prevents opportunities for “double-dipping” meaning that NFPs cannot have requested and received funds from another SBA program for identical uses. The application deadline is June 30, 2020.
The maximum loan amount is the lesser of $10 million or 2.5 times the average total monthly payroll costs (including benefits) during the one-year period before the date of the loan application.
Perhaps the aspect that makes this loan most attractive is the ability to have a portion of the loan forgiven, dependent on employee head count or employee wages in the eight-week period following the origination of the loan or by June 30, 2020. Borrowers must apply for PPP Loan forgiveness. Applications for forgiveness will require significant documentation of employment figures and payroll costs, etc. Forgiveness is possible up to the principal amount of the PPP Loan, if the loan was used entirely for (1) payroll costs including health insurance and specific other related costs; (2) payments of interest on mortgage obligations incurred before February 15, 2020; (3) payment on rent obligations including rent under lease agreements in force before February 15, 2020; and (4) payments for utilities (electricity, gas, water, transportation, telephone or internet access) for which service began before February 15, 2020. The percentage of the PPP Loan that will be forgiven will be reduced based on the reduction in the number of the borrower’s average number of full-time equivalent employees and the reduction in employees’ wages during the 8 weeks following loan origination, as compared to the average number of full-time equivalent employees per month in (A) the period from January 1, 2020 through February 29, 2020; or (B) the period from February 15, 2019 through June 30, 2019. Forgiveness is also reduced by the aggregate amount that any employee’s total salary or wages are reduced in excess of 25%, during the 8 weeks following loan origination, as compared to the most recent full quarter prior to the origination.
The maximum maturity of the unforgiven portion of the PPP Loan is 10 years from the date on which the borrower applies for loan forgiveness, a fixed maximum interest rate of 4.0%, and no prepayment penalties.
PPP Loans are 100% federally guaranteed loans (no personal guarantees are required), administered by the SBA and issued by private lenders.
Economic Injury Disaster Loans (“EIDL”)
EIDL is an emergency loan program offered directly by the government providing up to $2 million for eligible NFPs with fewer than 500 employees in working capital loans. EIDL is available to NFPs in states declared as disaster areas by the SBA. In order to be eligible, NFPs needed to be in business before January 31, 2020.
EIDL allows an advance of up to $10,000 in a grant to each applicant, paid within 72 hours after completion of and the loan application with the SBA.
The maximum loan amount is the lesser of $2 million or the amount of economic injury determined by the SBA less business interruption insurance recoveries.
The loan proceeds can be used for a variety of costs, including ordinary and necessary financial obligations that cannot be met as a direct result of COVID-19, operating expenses, payroll, rent and fixed and higher interest rate debts.
The loan terms include a maximum loan term of 30 years and a fixed maximum interest of 2.75%. There are no prepayment penalties; however, a personal / corporate guarantee is required for loans over $200,000. The NFP must pledge collateral when available and there is no loan forgiveness (except for the $10,000 advance).
Economic Stabilization Fund
A loan and loan guarantee program for mid-sized NFPs with between 500 and 10,000 employees, this program is available to nonprofits that have not received other economic relief in the form of loans or loan guarantees under other programs covered by the Act.
Loans, loan guarantees and investments made will be under terms and conditions and containing covenants, representations, warranties and requirements (including requirements for audits) as determined to be appropriate. The interest rate is no higher than 2% and the first six months does not accrue interest or require repayments.
NFPs receiving funds under this program must retain at least 90% of the NFPs’ workforce at full compensation and benefits through September 30, 2020. Loan forgiveness is expressly prohibited under this program.
Other Relevant Provisions:
Delayed Payment of Payroll Taxes
The Act allows NFPs to defer payment of Social Security (Old Age, Survivors, and Disability Insurance) taxes for the period from the date of enactment of the Act through December 31, 2020. All of the employer portion of the Social Security tax qualify for the deferral. Half of the deferred tax is to be paid by December 31, 2021 while the other half is to be paid by December 31, 2022.
It is important to note that the ability to delay payment does not apply if a NFP obtained a loan and has such loan forgiven under the PPP. Accordingly, doing a cost benefit analysis as to which provision of the Act is most beneficial in achieving sustainability is important before committing to a course of action.
For NFPs that pay their own unemployment insurance tax (known as self-insuring) by reimbursing their state unemployment insurance trust fund for the amount of unemployment benefits actually claimed by NFPs’ laid-off employees, the Act reimburses the NFPs for half of their costs of unemployment benefits provided to laid-off employees.
Employee Retention Payroll Tax Credit
The Act creates a new credit to claim against applicable employment taxes in an amount equal to 50% of the qualified wages paid or incurred between March 12, 2020 and January 1, 2021, with respect to certain employees, up to a maximum of $10,000 of wages per employee (or a maximum credit of $5,000 per employee).
NFPS are eligible if they were fully operational at the beginning of 2020, experienced a full or partially suspension of their operations due to COVID-19, and had seen a drop in revenue of at least 50% in the first quarter compared to the first quarter of 2019.
The credit can be claimed quarterly and any excess credit is treated as a refundable overpayment.
If the NFP receives a loan under the PPP, then the NFP is not eligible for this credit.
No one has been immune to the impact of this pandemic. Dermody, Burke & Brown is committed to supporting the nonprofit sector and we will continue to keep you informed of relevant new developments.
Please feel free to contact your Dermody, Burke & Brown professional to further discuss any questions you may have.
The information reflected in this article was current at the time of publication. This article will not be modified or updated for any subsequent tax law changes, if any.