The Coronavirus Aid, Relief and Economic Security (CARES) Act provides economic relief to organizations, including nonprofits, facing financial challenges as a result of the coronavirus (COVID-19) pandemic. Claiming many of these benefits, however, requires organizations to navigate a complex web of eligibility requirements and select among mutually exclusive options. This LawFlash provides a clear overview of these CARES aid requirements for nonprofits.
The CARES Act provides $2 trillion in economic stimulus and makes a number of benefits explicitly available to tax-exempt organizations to help support their operations in the wake of COVID-19 and its resulting economic fallout. Specifically, these benefits include the following measures:
- Paycheck Protection Program
- Economic Injury Disaster Loans
- Employee Retention Payroll Tax Credit
- Payroll Tax Deferral
Paycheck Protection Program
The Paycheck Protection Program (PPP) offers partially or fully forgivable loans of up to $10 million through the Small Business Administration (SBA) targeted to “small businesses” to help keep their workers employed. PPP extends the existing Small Business Act Section 7(a) loan program to section 501(c)(3) organizations and section 501(c)(19) veterans organizations. Other exempt organizations are not currently eligible for PPP loan funding. SBA has issued an interim final rule on the PPP clarifying that the available $349 million loan funding is being distributed on a “first come, first served basis.”
Borrower Eligibility: Organizations are eligible if they meet either of the following criteria for number of US-based employees (full-time, part-time, and seasonal), including the employees of their “affiliates”:
- 500 or fewer employees
- More than 500 employees but fewer than the number of employees under the SBA’s size standards for that organization’s North American Industry Classification System (NAICS) code.
Read more on key updates to the Paycheck Protection Program.
Increased limit for certain industries: The SBA regulations specify size standards in terms of annual receipts or number of employees (view the SBA’s full table of NAICS codes and related size thresholds). If the SBA regulations have measured the size standard for an organization’s NAICS code using number of employees, the organization can use that number, instead of the baseline of 500 employees, for purposes of determining eligibility.
For example, a nonprofit newspaper described in NAICS code 511110 can qualify as a small business with up to 1,000 employees. However, it appears that that the 500 employee standard will apply to most organizations because most of the NAICS codes associated with nonprofit work, such as hospitals, colleges and universities, social services, museums, and all organizations under NAICS code 813 are measured based on annual receipts.
Affiliation Rules: SBA takes into account the number of employees of any “affiliate” in determining eligibility under the existing size standard. SBA considers two persons or entities to be affiliated when one controls or has the power to control the other, or a third party controls or has the power to control both. Thus, affiliation picks up another organization related through common control, and also any organizations controlled by the affiliated organization. It does not matter whether control is actually exercised so long as the power to control exists. Read more on Affiliation Rules.
SBA recently issued FAQs and an interim rule that provide an exception to the affiliation rules for certain faith-based organizations. The exception waives any affiliation between a faith-based organization and any other organization that is “based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.” However, the exception does not apply to a religious organization’s affiliation with another entity for any other reason, such as “administrative convenience.” Religious organizations are directed to submit a statement, as an attachment to the organization’s PPP application, containing the organization’s good faith determination that the exception applies.
Definition of Control: One of the most common ways that SBA finds control (and hence, affiliation) is where an individual or another business concern owns more than 50% of the voting equity of the business concern seeking financial assistance. For nonprofit organizations, SBA would likely evaluate board control, which would be similar to tests for relatedness under the federal tax rules. However, under the current SBA rules even a minority interest has “negative control” where it has the power to block actions related to the daily operations of the business concern (e.g., hiring or firing officers, borrowing money, or paying dividends).
Employee Sharing Arrangements: Employee sharing arrangements are common among nonprofit organizations and raise a number of additional considerations. For example, it is not clear how employees who split their time between affiliated organizations would be counted, and a sharing agreement may provide the kind of “negative control” that would cause a finding of affiliation. Furthermore, when one organization reimburses another for withholding and making payroll tax payments, there are additional concerns such as documenting that loan funds were used for payroll costs.
Certification: In order to secure a loan, eligible organizations must provide a good faith certification that
- the loan is necessary to support ongoing operations due to the uncertainty of current economic conditions;
- the organization will use the funds to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and
- the organization is not applying for or already receiving duplicative funds from another SBA program.
Loan Terms: Key loan terms include the following:
- Maximum Amount. The maximum amount of the loan will be the lesser of $10 million or 2.5 times the organization’s average monthly payroll for the past 12 months (excluding compensation over $100,000). Special calculation rules apply for borrowers with a seasonal workforce.
- Interest Rate. Interim guidance has provided an interest rate of 1%.
- Optional Deferment. Deferment of principal, interest, and fees for a period of six months is available.
- Use of Loan Proceeds. Organizations may use loan proceeds to cover payroll costs, group healthcare benefits, mortgage interest payments, rent, utilities, and interest on prior debt.
- Loan Limitations. Loan proceeds may not be used for employee salaries in excess of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation.
- Collateral and Fee Waivers. Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
- Increased Lender Pool and Flexibility. The SBA is delegating to lenders the authority to make determinations on borrower eligibility and creditworthiness without going through traditional SBA channels. Furthermore, the SBA administrator and the secretary of the US Department of the Treasury have the authority to add additional lenders to the PPP.
Loan Forgiveness: One of the most favorable aspects of PPP is the eligibility for loan forgiveness on all loan proceeds used during the period that is eight weeks following the origination of the loan on (1) payroll costs, (2) mortgage interest payments, (3) rent payments, and (4) utility payments. Organizations must spend a minimum of 75% of loan proceeds on payroll costs during the eight-week period in order to qualify for forgiveness. Amounts forgiven will be treated as non-taxable cancelled indebtedness.
The amount forgiven cannot exceed the principal amount of the loan, and the amount forgiven will be reduced to partial forgiveness based upon reductions in employees or employee salaries during the eight-week forgiveness period, disregarding employees who were terminated or had their salaries reduced by more than 25% before April 26, 2020 and whose employment or salaries are restored by no later than June 30, 2020.
Economic Injury Disaster Loans
The CARES Act also expanded the existing SBA Economic Injury Disaster Loan (EIDL) by relaxing certain program requirements. EIDL loans of up to $2 million are available to “private nonprofit organizations” (a more expansive category of organizations than PPP eligibility) that have suffered a substantial economic injury as a result of COVID-19.
Eligible Entities: Unlike PPP loans, EIDL loans are available to any non-governmental agency or entity that currently has (1) a determination letter recognizing it as an organization described in sections 501(c), (d), or (e); or (2) evidence from a state establishing that the entity is organized as, or doing business as, a nonprofit organization. For organizations that are not required to apply for recognition of exemption such as social welfare organizations, trade associations, or organizations that have yet to receive their determination letter, articles of incorporation providing that the organization is organized as a nonprofit corporation under state law should meet these requirements.
Advance of Funds: Organizations that meet the same size standards and affiliation rules described above for PPP can request an advance of up to $10,000 that can be used to provide paid sick leave to employees unable to work due to COVID-19, maintain payroll and retain employees, meet increased costs due to interrupted supply chains, make rent or mortgage payments, and repay other obligations. Organizations are not required to repay the advance on the loan, even if their loan application is denied. Read more on EIDL relief.
Employee Retention Payroll Tax Credit
The CARES Act provides up to $5,000 in refundable tax credits per employee as relief from the employment tax burden for nonprofit employers affected by COVID-19, providing a tax incentive to retain employees through the crisis.
Eligible employers may claim a refundable credit against the employer share of Social Security taxes imposed on FICA wages paid to employees as a result of COVID-19-related shutdowns and slowdowns. Any credit must first be reduced by any credits received for qualified sick or family medical leave paid under the Families First Coronavirus Response Act (FFCRA).
Organizations may file IRS Form 7200 to request an advance payment of the credit.
Read more on the Employee Retention Payroll Tax Credit.
Eligible Employers: An exempt organization is an “eligible employer” if
- its operations fully or partially shut down due to COVID-19-related government orders, or
- it experienced more than a 50% decline in gross receipts as compared to the corresponding calendar quarter in 2019.
Qualifying Wages: The credit applies to 50% of the “qualified wages” up to $10,000 paid to each employee between March 13-December 31, 2020, thus limiting the maximum potential credit to $5,000 per employee. The method for calculating “qualified wages” depends on whether the organization, together with any related organization in its section 414 control group, has more or fewer than 100 full-time employees (determined using the Affordable Care Act's measure of 30 hours per week) during 2019.
- For organizations with 100 or fewer full-time employees, all employee wages are qualifying wages for the tax credit.
- For organizations with more than 100 full-time employees, qualifying wages include only wages paid (including health benefits) to employees who are not providing services due to the shutdown or slowdown circumstances described above, provided that the wage payments during the leave period do not exceed the amount of wages that an employee would have received for an equivalent period of active work, measured by wages received during the 30-day period prior to the shutdown or slowdown.
Payroll Tax Deferral
The CARES Act provides that nonprofit employers’ Social Security tax payments otherwise due between enactment of the CARES Act on March 27, 2020, and December 31, 2020 may be delayed. The deadline for paying the first half of the deferred taxes is December 31, 2021, and the deadline for paying the remaining 50% of taxes is delayed until December 31, 2022. These delay relief provisions are available regardless of workforce size, unlike similar relief provided under the FFCRA.
In the event that an IRC 3504 agent or an IRC 3511 certified professional employer organization is directed to defer payment of deferrable Social Security taxes under the CARES Act by a common law employer (a/k/a “customer”), the CARES Act places sole liability for any deferred taxes on the customer. The CARES Act is silent as to tax liability in situations involving an IRC 3401(d)(1) statutory employer arrangement. Read more on the payroll tax deferral.
Interaction of Benefits
Interim guidance from SBA provides that organizations with outstanding EIDL loans made between January 31-April 3, 2020 can apply for a PPP loan. However, if an organization used its outstanding EIDL loans for payroll costs and is approved for PPP, it must use the PPP funds to refinance the EIDL for a qualifying payroll expense. The amount of PPP eligible for forgiveness must be reduced by any EIDL advance that the organization received. After receiving a PPP loan, an organization may not apply for a new EIDL loan.
Section 2301(j) of the CARES Act provides that an organization that receives a PPP loan is not eligible for the Employee Retention Payroll Tax Credit. Section 2302(a)(3) provides that an organization is not eligible for the payroll tax deferral if the organization had PPP, or other outstanding SBA indebtedness forgiven.
IRS guidance has not specifically addressed the interaction between payroll tax credits, including the Employee Retention Tax Credit under the CARES Act and the FFCRA Paid Sick and Paid Family and Medical Leave tax credit, and the payroll tax deferral.
Emergency Unemployment Relief: The CARES Act provides federal funding to reimburse section 501(c)(3) organizations for 50% of the costs of unemployment benefits provided to laid-off employees where the organization elected to reimburse the state for unemployment benefits actually paid rather than pay state unemployment insurance taxes for its entire workforce.
Above-the-line charitable deduction: In a course-correction from the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97), which put the charitable contribution deduction out of reach for all but the top 10% of individual taxpayers, taxpayers who do not itemize their deductions can deduct up to $300 for cash contributions made in 2020 to certain organizations described in Code Section 170(b)(1)(A).
The provision excludes gifts to private nonoperating foundations, supporting organizations, and gifts to establish new or maintain existing donor-advised funds. The $300 deduction is not affected by filing status; for example, taxpayers who are married filing jointly have the same above-the-line deduction as individuals and heads of household.
Modifications to itemized charitable deduction limits: Taxpayers may temporarily “zero out” their taxable income in 2020 by making gifts of cash in excess of the amounts otherwise deductible under current law.
Individuals may deduct “qualified contributions” up to 100% of the difference between an individual’s contribution base (i.e., the individual’s 2020 adjusted gross income computed without regard to any net operating loss (NOL) carryback to 2020) and all other deductible charitable contributions. Corporations may deduct any qualified contributions that in the aggregate do not exceed 25% (up from 10%) of the corporation’s taxable income. Individuals and corporations may carry over any contributions in excess of taxable income to later tax years.
The provision excludes gifts to private nonoperating foundations, supporting organizations, and gifts to establish new or maintain existing donor-advised funds. We note, however, that gifts to sponsoring organizations to establish a fund that is not classified as a donor-advised fund, such as a field of interest fund, may well be permitted.
Donors must be sure to follow the special procedures to elect the application of this provision, which is an extra step not usually required for other charitable contributions.
Modifications for Net Operating Losses: The CARES Act temporarily repeals the 80% of taxable income limitation on the utilization of NOL carryovers imposed by TCJA. Thus, for a taxable year beginning before January 1, 2021, an exempt organization can fully offset its unrelated business taxable income in that year with NOLs permitted to be carried to that year from other years, subject to the requirement to separately compute its unrelated business income for each separate trade or business under section 512(a)(6).
NOLs arising after December 31, 2020, will be subject to the 80% of taxable income limitation. In addition, taxpayers now may carry back NOLs arising in 2018, 2019, and 2020 to the taxpayer’s five preceding taxable years. However, organizations should consider any potential consequences of reopening closed tax years in order to take additional NOL carrybacks. Read more on NOL modifications.
Mid-sized business loan program: The CARES Act provides that the US Department of the Treasury will “endeavor” to implement a program to provide financing to banks and other lenders that make direct loans to mid-sized nonprofit organizations, defined as having between 500 and 10,000 employees.
These loans are subject to certain additional statutory criteria and obligations, and require eligible borrowers to make a “good faith certification” to a number of more onerous conditions, including that “the funds it receives will be used to retain at least 90 percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020.” Read more on the Coronavirus Economic Stabilization Act.
Coronavirus COVID-19 Task Force
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.