The Coronavirus Aid, Relief, and Economic Security Act (the Act), the largest federal relief package in U.S. history, was signed into law on March 27, 2020, in an attempt to counteract the disruption to the economy caused by the COVID-19 outbreak. This advisory summarizes the provisions of the Act of particular interest to the nonprofit sector. Many of these topics are addressed in more detail here.
Emergency Small Business Loans
The Act’s “Paycheck Protection Program” provides $349 billion for a new emergency loan program administered by the Small Business Administration (SBA) that provides federally backed loans to eligible businesses to help cover certain operational costs such as payroll, rent, and health benefits. In addition, borrowers are eligible for loan forgiveness to the extent that they spend the loan on qualifying expenses during the eight-week period following the loan’s origination, subject to reduction if the organization reduces its workforce or their wages.
Of particular interest to the nonprofit sector is the fact that unlike prior SBA programs, these loans are available to qualifying “nonprofit organizations” and “veteran organizations,” which are respectively defined for these purposes as Section 501(c)(3) and Section 501(c)(19) organizations. To qualify, an organization must have 500 or fewer employees, counting both full-time and part-time workers. An eligible organization may receive a loan of up to $10 million or 2.5 times its average monthly payroll costs from the prior year, whichever is less.
Economic Injury Disaster Loans
While the Act limits participation in the Paycheck Protection Program to nonprofit organizations qualified under Section 501(c)(3) or 501(c)(19), it expands eligibility for the SBA’s preexisting Economic Injury Disaster Loans program (the EIDL Program) for the period from January 31, 2020, through December 31, 2020, to include “private nonprofit organizations” with 500 or fewer employees, among others.
The EIDL program provides working capital loans of up to $2 million with annual interest rates of 2.75 percent for nonprofit organizations and maturity dates of up to 30 years. In addition, applicants to the EIDL Program can request advances of up to $10,000, which will be disbursed within three days of the SBA’s receipt of an application. Unlike the Paycheck Protection Program loans, loans made through the EIDL Program are not eligible for forgiveness, although a qualifying Section 501(c)(3) or 501(c)(19) organization can apply for and receive both forms of assistance.
Economic Stabilization Fund
The Act provides $500 billion to the Department of the Treasury and instructs the Treasury Secretary to provide funding for loans, loan guarantees, and other investments in accordance with the Federal Credit Reform Act of 1990. Of the $500 billion allocated for this fund, $454 billion is to be used to provide liquidity to “eligible business, States, or municipalities.” Within this allocation, the Treasury Secretary is to “endeavor” to implement a program providing funds to banks and other lenders that make direct loans to eligible business, including nonprofit organizations with between 500 and 10,000 employees. These loans would be subject to an interest rate of no higher than 2 percent and could not accrue interest or require repayment for the first six months.
To be eligible for these loans, a borrower cannot have received relief in the form of other loans or loan guarantees available under the Act and must make a good-faith certification that, among other things: (i) the uncertainty of economic conditions makes the loan necessary to support its ongoing operations; (ii) the borrower will retain at least 90 percent of its workforce at full compensation and benefits until September 30, 2020; and (iii) the borrower intends to restore not less than 90 percent of its workforce that existed as of February 1, 2020, within four months after the end of the COVID-19 public health emergency.
The Act directs the Department of Treasury to issue additional regulations and guidance on how this fund will work within 10 days of the Act’s passage.
Increased Charitable Giving Incentives
The Act encourages giving to Section 501(c)(3) organizations by providing an above-the-line deduction for charitable contributions of up to $300, meaning that all taxpayers and not just those who itemize their deductions on their tax returns, can claim a charitable contribution deduction for donations made to charity. The Act also raises the percentage of a donor’s adjusted gross income that can be offset by charitable contributions for taxpayers who do itemize. Specifically, the Act raises the limitation on individual taxpayers from 60 percent of adjusted gross income to 100 percent and the limitations on corporations from 10 percent to 25 percent.
To be eligible for the above-the-line deduction or the increased percentage limitations, the charitable contribution must be made in cash (as opposed to property) in 2020. In addition, the contribution cannot be made to a “supporting organization” within the meaning of IRC Section 509(a)(3), a donor advised fund, or a private non-operating foundation, each of which is otherwise eligible to receive tax-deductible charitable contributions.
Increased Utility for Net Operating Losses for Organizations with UBTI
The Act increases the utility of net operating losses (NOLs) by suspending certain tax law changes that were enacted at the end of 2017 as part of the Tax Cuts and Jobs Act (TCJA) tax reform legislation. Specifically, the Act:
- Permits NOLs from 2018, 2019, and 2020 to be carried back for five years (the TCJA repealed the five-year carryback of NOLs but enabled taxpayers to carry them forward indefinitely).
- Removes the taxable income limitation, meaning that a taxpayer can use an NOL to offset all of its taxable income in tax years 2018, 2019, and 2020 (tax reform limited the amount of taxable income that could be offset by an NOL to 80 percent).
This is relevant only for nonprofit organizations with loses from unrelated trade or business activities conducted in 2018, 2019, and 2020. But if an organization does have such losses, it may be able to use the five-year carryback to generate refunds of previously paid unrelated business income tax.
Employee Retention Payroll Tax Credit
Like other eligible employers, qualifying nonprofit employers can benefit from the Act’s refundable payroll tax credit known as the Employee Retention Credit. The credit is equal to 50 percent of wages paid to each employee, subject to a maximum per employee tax credit of $5,000.
To be eligible, a nonprofit employer must have been in operation during 2020 and either:
- Have operations fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings in response to COVID-19; or,
- Have a reduction in revenue of at least 50 percent, which is measured by comparing the applicable calendar quarter to the same quarter of 2019.
If a nonprofit employer has more than 100 full-time employees, the credit is available only with respect to wages that the employer pays employees who are not providing services due to the suspension of the business or reduction in gross receipts. The credit is available for wages paid or incurred from March 13, 2020, through December 31, 2020.
Note that a nonprofit employer that receives a loan under the SBA’s Paycheck Protection Program is not eligible to claim the Employee Retention Credit.
Delayed Employer Payroll Tax Payments
The Act also permits employers, including nonprofit employers, to delay payment of the employer share of payroll taxes otherwise due for wages paid during 2020, with half of the delayed tax payment being due by December 31, 2021, and the other half by December 31, 2022.
Note that this option to delay payment is not available to a nonprofit employer that receives a loan that is forgiven under the SBA’s Paycheck Protection Program.