On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion Phase 3 COVID-19 emergency relief bill aimed at providing much-needed relief to the American people and businesses in response to the coronavirus COVID-19 outbreak. The CARES Act provides direct financial help to individuals and families; immediate assistance for hospitals, healthcare first responders, and patients; financial support and tax incentives for small businesses and nonprofit organizations; and assistance for distressed industries.
The CARES Act includes a number of provisions of relevance to non-profit organizations, including:
- Expanded eligibility for non-profits to apply for Small Business Administration (SBA) loans;
- Opportunities for larger non-profits to apply for relief under a new program at the Department of Treasury;
- Expanded unemployment benefits to employees who lose their jobs due to COVID-19; and
- Tax incentives for employers to retain employees during the pandemic.
Below is the summary of the provisions of interest to nonprofits, as well as several considerations for your organization in response to the COVID-19 pandemic.
Nonprofit Eligibility for Small Business Loans and Grants
Paycheck Protection Program
The CARES Act provides $349 billion for the new “Paycheck Protection Program” (PPP).
Unlike other Small Business Administration (SBA) programs that are limited to for-profit businesses, the Paycheck Protection Program measure, codified at Section 1102 of the CARES Act, defines eligible businesses to include nonprofit organizations, but only to non-profit organizations tax-exempt under Section 501(c)(3) or veterans organizations tax-exempt under Section 501(c)(19) of the US Internal Revenue Code. All other nonprofit organizations are ineligible to participate.
Through the PPP, small businesses and other eligible entities such as 501(c)(3) and 501(c)(19) organizations can receive a loan of up to $10 million with loan repayments deferred for up to a year. Importantly, the SBA will grant forgiveness up to an amount equal to eight weeks of payroll and other certain costs if the borrower retains its employees and maintains salary levels. All loan fees are waived for borrowers and lenders. Unlike traditional 7(a) loans, an applicant does not need to demonstrate they are unable to obtain credit elsewhere, nor do they have to provide a personal guarantee or provide collateral to receive a PPP loan.
The loans must be used for the following types of expenses:
- Payroll costs, including compensation to employees; payments for vacation, parental, family, or medical or sick leave; severance payments; payments required for group healthcare benefits (including insurance premiums), retirement benefits, and state and local employment taxes.
- Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal).
- Rent for a lease entered into before February 15, 2020.
- Utilities (including electricity, gas, water, transportation, telephone or internet).
Note that loans cannot be used for compensation of individual employees, independent contractors or sole proprietors in excess of an annual salary of $100,000; compensation of employees with a principal place of residence outside the United States; or leave wages already covered by the Family First Coronavirus Response Act.
Loan Repayment
Unlike traditional SBA 7(a) loans, no personal guarantee will be required to receive funds, and no collateral needs to be pledged. A 501(c)(3) or 501(c)(19) nonprofit would also not be required to show that it cannot obtain credit elsewhere. Rather, such organizations must certify the loan is necessary because of the uncertainty of current economic conditions; they will use the funds to retain workers, maintain payroll or make lease, mortgage, and utility payments; and they are not receiving duplicative funds for the same uses. Payments of principal, interest, and fees will be deferred for at least six months, but not more than one year, and interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
In addition, the SBA has no recourse against any individual, shareholder, member or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
PPP Loan Forgiveness
Under Section 1106 of the CARES Act, 501(c)(3) and 501(c)(19) nonprofit organizations are eligible for loan forgiveness for eight weeks, commencing from the origination date of the loan of payroll costs and rent payments, utility payments or mortgage interest payments. Eligible payroll costs do not include annual compensation greater than $100,000 for individual employees.
The amount of loan forgiveness may be reduced if the organization reduces the number of employees as compared to the prior year or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Organizations that re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. Forgiveness may also include additional wages paid to tipped workers.
What About All Other Types of Nonprofit Organizations with 500 or Fewer Employees?
The emergency financial relief for other types of nonprofits, such as 501(c)(4) social welfare organizations and 501(c)(6) trade and professional associations, is available under a separate section of the legislation addressing emergency Economic Injury Disaster Loan (EIDL) grants. In addition, nonprofit organizations of all types that do not receive SBA Paycheck Protection Program 7(a) loans are also eligible for Employee Retention Payroll Tax Credits under Section 2301 of the CARES Act.
Emergency Economic Injury Disaster (EIDL) Grants
The package includes $10 billion for SBA to provide emergency EIDL grants until December 31, 2020.
Eligibility for Nonprofits and Requirements for Emergency EIDL Grants
All “private nonprofit organizations” are eligible for purposes of the EIDL program, including any entity exempt under section 501(c), including trade associations, advocacy organizations, unions, and social clubs otherwise excluded under the Payroll Protection Program.
Section 1110 waives the standard EIDL program requirements that (1) the borrower provide a personal guarantee for loans up to $200,000; (2) the eligible nonprofit be in operation for one year prior to the disaster (except that the nonprofit must have been in operation on January 31, 2020); and (3) the borrower be unable to obtain credit elsewhere.
In addition, unlike other types of nonprofit organizations, entities organized under section 501(c)(3) or 501(c)(19) may apply for an EIDL grant in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose.
$10,000 Emergency Advance Under Emergency EIDL Grant Program
Most significantly for nonprofit organizations seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments or repaying obligations that cannot be met because of revenue losses.
For nonprofit organizations, the entity’s whole operations must be taken into account when determining the decline in revenues.
Employment Provisions
Nonprofit organizations are faced with a number of challenging decisions in response to this crisis, including weighing whether to continue to pay workers or make the difficult decision to lay off employees. Congress enacted these benefits to support employees who lose their jobs due to the pandemic.
Unemployment Benefits
The Act creates a temporary “Pandemic Unemployment Assistance” program to provide expanded unemployment benefits without a waiting period to workers who are unemployed, partially unemployed or temporarily unable to work as a result of the coronavirus pandemic between January 27, 2020 and December 31, 2020. The Act includes a specific section related to nonprofit organizations which allows these organizations to be reimbursed for half of the costs incurred through the end of 2020 to pay unemployment benefits.
The Act also provides an additional $600 per week payment to those receiving unemployment benefits under their respective state laws and Pandemic Unemployment Assistance participants for up to four months. In addition, the Act provides federal funding for 13 weeks of additional unemployment benefits through the end of 2020.
Tax Provisions
Employee Retention Credit for Employers
Nonprofits organized under 501(c) are eligible for the new partially refundable employee retention credit authorized by the legislation. The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose:
- Operations were fully or partially suspended, due to a COVID-19-related shut-down order, or
- Gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
All 501(c) organizations are eligible to take advantage of the Employee Retention Tax Credit, but as noted above, any 501(c)(3)s receiving a loan under the Paycheck Protection Program detailed above are ineligible for this tax credit.
Expanded Charitable Deductions
The Act provides individuals with a $300 deduction for donations to charitable organizations available regardless if taxpayer itemizes their deductions. The Act also suspends recent limitations on charitable donations by individuals, such as the 60 percent adjusted gross income limitation, and by corporations, by increasing the limitation from 10 percent to 25 percent of taxable income.
Delay of Certain Payroll Tax Payments
Under the proposal, employers, including tax exempt organizations, and self-employed individuals, may defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
Minimum Funding Rules for Certain Charities
The CARES Act modifies the minimum funding rules for pension plans sponsored by charitable organizations whose primary purpose is to provide medical care and assistance to mothers and children to allow for more flexibility in the amount of required payments.
Calibre CPA Group is monitoring legislative and regulatory developments especially for tax-exempt organizations and will provide updates as more guidance is released. In the interim, if you have any questions, please contact us.
Article Prepared By:
Lila Leno, CPA, MBA | Partner
