Relief to Nonprofits and Incentives for Charitable Giving under the CARES Act

Sullivan & Worcester

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), signed into law by President Trump on March 27, 2020, provides access to loans or tax credits to certain nonprofit organizations and encourages increased charitable giving to most public charities in 2020.

For a more general discussion of the CARES Act's benefits for small businesses and individuals, click here.

Loan and Credit Opportunities

Paycheck Protection Program

In General: The CARES Act enables the Small Business Administration ("SBA") to provide loans backed by the federal government to qualifying small businesses to pay certain operating costs. Charities described in Internal Revenue Code Section 501(c)(3) and veterans organizations described in Code Section 501(c)(19) are eligible for this program. If the loan proceeds are put to authorized uses, some or all of the loan may be forgiven, thus turning the loan into a grant.

Loan Amount and Use of Proceeds: The maximum amount that can be borrowed is 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made. No loan may exceed $10 million. Proceeds of the loan must be used for payroll costs (including salaries, paid leave, severance payments, healthcare benefit costs, payroll taxes and other costs), interest payments on mortgages, rent payments, utility payments and interest payments on certain debt obligations. Proceeds may not be used for compensation for an individual employee or independent contractor in excess of annual compensation of $100,000, or for compensation to an employee who has a principal residence outside the United States, or for wages already subsidized under one of the new Families First Coronavirus Response Act leave programs.

Favorable Terms: Lenders may not charge an interest rate on the loan that exceeds four percent. Principal and interest payments may be deferred for at least six months, but not for more than one year. The loan need not be secured by any collateral and need not be personally guaranteed. The loan may not have any prepayment penalties. As guarantor of the loan, the SBA generally has no recourse against any individual or governing member of an eligible nonprofit for non-payment so long as the nonprofit uses the loan proceeds as permitted under the CARES Act. The fees received by lenders for processing these loans are not imposed on the recipients of the loans.

How to Qualify: Eligible nonprofits must submit to their bank a good-faith certification that, among other things, the uncertain economic conditions caused by COVID-19 make the loan necessary to support their operations and that the loan proceeds will be used to retain workers, maintain payroll and make other necessary payments. The applying nonprofit organization must not employ more than 500 employees (including full-time, part-time and other workers). In determining the number of employees for qualification purposes, nonprofits are subject to the same affiliation rules as other eligible small businesses.

Loan Forgiveness: If a nonprofit uses the loan proceeds in accordance with the requirements of the CARES Act, the principal amount of the loan used for such authorized expenses, but not any associated interest, will generally be forgiven, thus turning the loan into a grant. If a nonprofit reduces its workforce or salaries after receiving a loan under this program, it may not qualify for loan forgiveness or may qualify for only partial forgiveness. In addition, the amount of loan forgiveness is subject to certain reductions including (i) a reduction in the number of employees comparing the period from March 1, 2020 to June 30, 2020 against the period from March 1, 2019 to June 30, 2019 and (ii) a reduction in excess of 25% of compensation in the most recent full quarter in which an employee was paid compensation during the period from March 1, 2020 to June 30, 2020. Nonprofits may re-hire employees previously terminated or increase previously reduced salaries and still qualify for loan forgiveness so long as certain conditions are met.

To apply for loan forgiveness, eligible employers will need to submit certain information and documents, including, among others, payroll filings and proof of rent or mortgage payment, a certification that the documentation is true and correct and a certification that the amount for which forgiveness is requested was used for employee retention and other applicable operating expenses. The maturity date for any remaining balance on a loan after certain loan proceeds are forgiven cannot exceed ten years. Amounts forgiven under this program are not included in gross income, and for public charities subject to the public support test, it may be reasonable to consider such amounts as grants received from a governmental entity not subject to the two percent filter.

What to Do: The loans will be processed or underwritten by banks and other SBA approved lenders. Eligible nonprofits can work directly with their banks to obtain loans. Each bank may have specific document requests in addition to the good-faith certification discussed above, so nonprofits should be sure to call their loan officers to discuss. In addition, it is important to consider that any existing credit facilities may contain restrictions on the incurrence of additional debt. Such existing credit facilities should be carefully reviewed and may need to be amended or applicable provisions waived by existing lenders. It is also important to note that proceeds under such existing credit facilities, as well as other sources of cash, may be available for similar uses as loan proceeds under the CARES Act.

Employee Retention Credit

Employers, including nonprofit employers, may be eligible for a new employee retention credit in an amount equal to 50% of “qualified wages” paid through year-end up to $10,000 per employee. For this purpose, qualified wages include the employer’s health plan costs (typically the applicable premium). Organizations described in Code Sections 501(c)(3) and 501(c)(19) that utilize the Paycheck Protection Program discussed above are not eligible to access this retention credit, and additional rules prevent the claiming of multiple credits available under other programs for the same wages.

To benefit from the new credit, the nonprofit employer must be carrying on a trade or business during 2020 and all of its operations must either be fully or partially suspended by a governmental authority as a result of the coronavirus pandemic, or the nonprofit must experience a "significant" decline in gross receipts (measured by comparing prior year comparable quarterly receipts). The credit applies to qualified wages paid between March 13, 2020 and December 31, 2020. Larger employers (average number of full-time employees in 2019 was more than 100) are subject to additional requirements.

The credit itself is generally available through a payroll tax deposit reduction, but only with respect to the employer share of FICA (6.2% up to $137,700 (for 2020)). Otherwise, the nonprofit will receive a refund.

Additional Resources

In addition to the above relief programs, an expansion of the SBA’s emergency Economic Injury Disaster Loan program makes nonprofit organizations with fewer than 500 employees eligible in 2020 to apply for grants for up to $2,000,000 at 2.75% interest. Nestled in this loan program is an emergency advance grant of $10,000 that can be provided within three days of applying for the loan, and which need not be repaid even if the loan application is ultimately denied.

Further, pursuant to the broad authority given to the Secretary of the Treasury to provide liquidity to eligible business and governmental entities under Section 4003 of the CARES Act, larger nonprofit organizations (employing between 500 and 10,000 people) may be eligible to receive loans at 2% interest, with a deferral of interest and principal payments for at least the first six months of the loan.

Charitable Giving Incentives

Suspension of Percentage Limitation

Background: Current law limits to a percentage of adjusted gross income ("AGI") the amount of charitable contributions a taxpayer may deduct in any given year. The applicable percentage limitation depends on the kind of property donated and the nature of the recipient charity. In general, the percentage limitation for contributions to a public charity is 50% of AGI for cash gifts and 30% of AGI for gifts of appreciated long-term capital gain property. For tax years beginning after December 31, 2017, the limitation for cash gifts to public charities can be increased to 60% of AGI. The percentage limitations for contributions of cash and certain appreciated capital gain property to a private foundation are 30% and 20%, respectively. Ordering rules apply if gifts to both public charities and private foundations are made. If a taxpayer’s contribution exceeds the applicable limitations, the excess contribution is carried forward to the following five years.

New Law: The CARES Act generally suspends any percentage limitation for "Qualified Contributions" made in 2020 to most public charities. Qualified Contributions are cash donations to public charities, other than contributions to supporting organizations described in Code Section 509(a)(3) or contributions to create or maintain a donor advised fund described in Code Section 4966(d)(2). The exclusion of supporting organizations and donor advised funds from this definition reflects Congressional intent to encourage contributions directly to operating charities that may be on the frontlines of combatting COVID-19. Notwithstanding, there is no requirement that Qualified Contributions be made for purposes related to COVID-19.

The taxpayer must elect to have the percentage limitation suspension apply to the taxpayer’s cash contribution. For contributions by partnerships and Subchapter S corporations, the individual partner or shareholder makes this election.

For the extraordinarily generous person, in 2020 it will be possible to offset 100% of the taxpayer’s income (thus eliminating all federal income tax) so long as the excess of the taxpayer’s contributions over the amounts allowed within the existing percentage limitations is composed entirely of Qualified Contributions.

For Corporations: For Qualified Contributions made in 2020 by corporations, the CARES Act increases the current percentage limitation of 10% to 25% of the corporation’s taxable income.

Contributions of Food Inventory: In addition, the percentage limitation that applies to contributions of food inventory to which Code Section 170(e)(3)(C) applies is increased to 25%.

Incentive for Individual Non-itemizers

The increased standard deduction introduced by the 2017 Tax Cuts and Jobs Act means fewer taxpayers elect to itemize deductions. For 2020 the individual standard deduction is $12,400 and $24,800 for married filing jointly. Accordingly, the standard deduction has subsumed the deduction of many small charitable contributions. The CARES Act introduces an above-the-line deduction for "qualified charitable contributions" not to exceed $300 for tax years beginning in 2020. This above-the-line deduction is available only to taxpayers who do not elect to itemize deductions. Qualified charitable contribution for this purpose has the same meaning as a Qualified Contribution described in the preceding section.

This new above-the-line provision is only applicable for 2020.

Assisting Individuals Impacted by COVID-19

President Trump declared the coronavirus pandemic a qualified disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act on March 13, 2020. This declaration means that payments that meet the requirements of a qualified disaster relief payment under Code Section 139 are excludible from an individual’s income. See Sullivan’s Employment & Benefits Client Alert.

A qualified disaster relief payment is an amount paid "to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster," so long as those expenses are not compensated for by insurance or otherwise. While these payments cannot be used to exempt income replacement payments (wages), other amounts may be considered exempt.

The qualified disaster declaration together with Code Section 139 generally loosens the requirement that nonprofits make a formal needs-based assessment prior to making relief payments to individuals. This is particularly helpful to charities whose primary mission is to assist victims of qualified disasters in a timely manner. There is also a clear pathway for corporate foundations to utilize qualified disaster relief payments to assist employees of their employer sponsor without running afoul of self-dealing rules or making taxable expenditures.

Nonprofit organizations more generally also may utilize qualified disaster relief payments to assist their own employees, as well as others in their communities, who are in financial distress due to the pandemic. We can assist your nonprofit organization in crafting a program designed to ensure that the amounts paid to individuals are reasonably expected to be commensurate with the expenses incurred, that the payments do not run afoul of the rules regarding the use of assets to confer an impermissible private benefit and that the payments are reasonably within the scope of the nonprofit’s charitable mission.

For additional CARES Act changes not discussed here, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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