The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law by President Trump on March 27, 2020. The CARES Act is a $2.2 trillion stimulus law intended to provide financial support to individuals and businesses in response to the coronavirus pandemic.
In particular, the CARES Act contains various provisions that are pertinent to tax-exempt organizations. Those provisions are summarized below.
Small Business Administration (SBA) 7(A) Loan Program – Paycheck Protection Program (“PPP”) (Section 1102)
The CARES Act establishes emergency loans for eligible businesses including nonprofit organizations. However, this provision is limited only to charitable organizations exempt from tax under Section 501(c)(3) of the Internal Revenue Code. To qualify, the nonprofit must have no more than 500 employees, including full-time and part-time employees.
The loan amount is equal to the lesser of $10 million or 2.5 times average total monthly payroll costs during the prior year. The loan proceeds may be used for the following:
- Payroll costs, including compensation to employees (limited to $100,000 per employee);
- Health benefits during sick or family leave;
- Retirement benefits;
- Interest on a mortgage;
- Rent; and
The interest rate is 0.5%, and the loan will mature in 2 years. Payments of principal/interest will be deferred for 6 months. In addition, no personal guarantee or collateral will be required to secure the funds nor will the SBA impose any borrower or lender fees.
Notably, employers that maintain employment for 8 weeks from the origination date of the loan, or rehire employees by June 30, are eligible for loan forgiveness, thus basically converting the loan into a grant.
Additional guidance regarding this program is available on the U.S. Department of Treasury website, including the borrower’s application.
Economic Injury Disaster Loan (“EIDL”) (Section 1110)
All tax-exempt entities (i.e., charitable organizations, trade associations, social clubs, etc.) with no more than 500 employees may apply for the economic injury disaster loan with the SBA. Qualification for the EIDL is based on the applicant’s credit score. The loan proceeds can be used for payroll costs, rent, mortgage, or other debt payments. An organization may receive up to $10,000 as an advance, within 3 days of application, if the SBA certifies that the entity is eligible. This provision enables nonprofits to quickly access financial assistance while their loan is being processed. If the loan application is denied, the $10,000 advance is not required to be repaid.
Industry Stabilization Loan Program (Section 4003)
This provision creates a loan program for an “eligible business” that has between 500 and 10,000 employees. Although these loans cannot be forgiven, the loans have the following terms: (1) an interest rate of no more than 2%; and (2) no interest accrual or repayment for the first 6 months. The funds must be used to retain employees and restore compensation and benefits.
Nonprofits that are ineligible for the SBA Payroll Protection Program may qualify for a stabilization loan. Further guidance will be needed to clarify this position.
Employee Retention Payroll Tax Credit (Section 2301)
The CARES Act generates a refundable payroll tax credit of up to $5,000 for each employee when the employer satisfies the following criteria:
- The operation of its business is fully or partially suspended during the calendar quarter resulting from government mandates limiting commerce, travel, or group meetings due to COVID-19; or
- The gross receipts for the first quarter of 2020 are 50% less than the first quarter in 2019.
For tax-exempt organizations, the entity’s whole operations must be considered when evaluating eligibility for the credit.
It is important to note that employers that receive a loan under the SBA Paycheck Protection Program are not eligible for the payroll tax credit.
Delayed Payment of Payroll Taxes (Section 2301)
This provision permits delayed payment of the employer portion of payroll taxes – 50% of employment taxes for 2020 are due by December 31, 2021, with the remaining 50% due by the end of 2022. The delay is not applicable to an employer that received loan forgiveness under the SBA Paycheck Protection Program.
Unemployment Benefits for Tax-Exempt Entities (Section 2103)
Nonprofits will be reimbursed for 50 percent of the costs incurred through the end of 2020 to pay unemployment benefits. This provision applies to organizations that have opted not to pay unemployment taxes, but instead reimburse states for benefits paid to former employees.
Expansion of Unemployment Benefits (Section 2104)
Payments for workers who are furloughed, contractors, or self-employed will increase by $600 per week for 4 months, in addition to their state unemployment benefits.
Amendments to New Paid Leave Requirements (Section 3601 and 3602)
This provision lowers the amounts that employers are required to pay for leave under the Families First Coronavirus Response Act (enacted March 19) to a maximum of $511 per day for sick leave and $200 for family leave.
Above-the-Line Deduction for Charitable Contributions (Section 2204)
The CARES Act creates a new above-the-line deduction, which is applicable for all taxpayers (even those that do not itemize) for charitable contributions of up to $300. This incentive is effective for contributions made in 2020 which would be claimed on Form 1040 next year.
Suspension of AGI Limitation for 2020 (Section 2205)
The CARES Act suspends the existing limitation on a charitable contributions for individuals that itemize, thus raising it from 60% of adjusted gross income to 100% for the 2020 tax year. The limit for contributions from corporations is increased from 10% of taxable income to 25%. These changes are not applicable for contributions made to a supporting organization or to a donor-advised fund.
Contributions of food inventory would increase to 25% (up from the 15% limitation).
Other Notable Provisions
Recovery Rebates for Individuals (Section 2201)
Within a few weeks, each adult will receive a check for up to $1,200 and an additional $500 for every child. The payment amount phases out based on earnings between $75,000 and $99,000 for individuals ($150,000/$198,000 for couples).
Other Spending Programs
The CARES Act also provides for significant funds to be distributed to assist various sectors including health care, education, transportation, and others.
We can help
Our Nonprofit Team is closely following legislative developments and will provide updates as additional guidance is released.
In the meantime, for additional information, please visit the COVID-19 Resource Center.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.