The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law by President Trump on March 27th. The CARES Act is a $2.2 trillion relief bill which is aimed at providing relief to businesses and individuals in response to the coronavirus outbreak. The CARES Act contains provisions to provide relief through direct financial payments to certain individuals and families, provisions to assist hospitals and healthcare responders, financial support and tax incentive provisions for small businesses and nonprofit organizations and assistance for certain distressed industries such as the airlines industry. The CARES Act contains provisions that may apply to nonprofit organizations but the relief and process for applying for and obtaining the relief depends on the nonprofit’s tax classification under Section 501(a) of the Internal Revenue Code.
501(c)(3) and 501(c)(19) organizations with fewer than 500 employees
Paycheck Protection Program
The Paycheck Protection Program is a program under the CARES Act that has designated $349 billion for small businesses through federally-backed loans under a modified and expanded Small Business Administration (SBA) 7(a) program. The Paycheck Protection Program includes as eligible businesses nonprofit organizations but only 501(c)(3) organizations and 501(c)(19) organizations that employ not more than 500 employees (includes both full-time and part-time employees). All other nonprofit organizations are ineligible to participate in the Paycheck Protection Program.
Under the provisions of the Paycheck Protection Program 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. The amount that can be received is the lesser of $10 million or 2.5 times the average total monthly payroll costs from the prior year. The loans must be used to cover: payroll costs including compensation to employees, payments for vacation, family, parental, sick or medical leave, payments for required group healthcare benefits, retirement benefits, and state and local employment taxes; rent; utilities; and interest on mortgage debt and other debt incurred before February 15, 2020. Note that the loans do not include principal payments on the debt. Another restriction is that the loans cannot be used for compensation of employees in excess of an annual salary of $100,000, compensation of employees with a principal residence outside of the United States or leave already covered under the Families First Coronavirus Response Act.
All loan fees are waived for borrowers and lenders. Unlike traditional 7(a) loans, an applicant does not need to demonstrate that it is unable to obtain credit elsewhere, nor does it have to provide a personal guarantee, and no collateral needs to be pledged. The organization must certify that the loan is necessary because of the uncertainty of current conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving funds for the same uses from other sources. Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year, and interest rates are capped at 4 percent. The loans are non-recourse unless the loan proceeds are not used for the intended purposes.
Additionally, the SBA may 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. Loans will be eligible for payment deferment for at least 6 months and no more than one year, as well as forgiveness for the total amount borrowers spent on payroll costs and mortgage interest, rent, and utility payments between February 15 and June 30, 2020. Any canceled indebtedness will not be included in the borrower’s taxable income. The amount of the 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 percent as of the last calendar quarter.
By participating in the CARES Act an organization may become ineligible for other relief provided in the CARES Act such as the Employee Retention Payroll Tax Credits (see below).
Under the terms of the CARES Act the SBA is directed to issue regulations to carry out the CARES Act provisions within 15 days of enactment of the law. The loans are to be available through approved banks and nonbank lenders eliminating the need to go through the SBA. We will keep you updated on the guidance from the SBA as it becomes available.
Other types of nonprofit organizations with 500 or fewer employees
Economic Injury Disaster Loan grants
Emergency financial relief for other nonprofit organizations, such as (c)(4) and (c)(6) organizations is available under provisions of the CARES Act in a section that provides for Economic Injury Disaster Loan (EIDL) grants. All private nonprofit organizations are eligible for the EIDL program. In addition, nonprofit organizations of all types that do not receive loans under the Paycheck Protection Program are eligible for Employee Retention Payroll Tax Credits, see below.
The CARES Act provides an additional $10 billion into SBA’s existing EIDL program, expands eligibility for EIDL loans, and waives certain requirements for all applicants, which include private nonprofit organizations with 500 or fewer employees. The covered period for this section is January 31, 2020 through December 31, 2020. The EIDLs provide up to $2 million for working capital and have a 2.75% rate for nonprofit organizations.
Under the CARES Act, for EIDL loans made before December 31, 2020 due to COVID 19 the SBA will waive the standard EIDL program requirements that (1) the borrower provide a personal guarantee for loans up to $200,000; (2) that 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) that the borrower be unable to obtain credit elsewhere. Further, the CARES Act establishes that a federally-declared emergency qualifies for the EIDL making the EIDLs available nationwide.
The EIDL loans can be obtained by (c)(3) and (c)(19) organizations that have received loans under the Paycheck Protection Program so long as the loans are not used for the same purposes.
$10,000 Emergency Advance under Emergency EIDL Grant Program
Nonprofit organizations can request an emergency $10,000 EIDL advance of funds, 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.
Employee Retention Payroll Tax Credits
The CARES Act also provides for a refundable payroll tax credit for nonprofits organized under Section 501(c). This provision of the CARES Act provides a refundable payroll tax credit for 50% of wages for the first $10,000 of compensation, or up to $5,000, for each employee when certain conditions are met. To be eligible the organization must have been in business during calendar year 2020 and meet one of the following two tests:
- Gross receipts declined by more than 50% when compared to the same quarter in the prior year, or
- Have operations fully or partially suspended during the calendar quarter because of orders from a government authority limiting commerce, travel, or group meetings due the coronavirus.
For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances. 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 wages paid or incurred from March 13, 2020 through December 31, 2020.
Expanded Charitable Deductions
The CARES Act provides individuals with a $300 deduction for donations to 501(c)(3) charitable organizations regardless of if taxpayer itemizes their deductions. The incentive applies to contributions made in 2020.
The CARES Act also suspends the cap on the annual charitable donations deduction for those individuals who itemize by raising the cap from 60 percent of adjusted gross income to 100 percent of adjusted gross income. For corporations the CARES Act increased the limitation to 25 percent of taxable income.
Delay of Employer Portion of Social Security Payroll Tax Payments
Provisions of the CARE Act allow employers, including tax-exempt organizations, to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying. The provision requires that the deferred Social Security taxes 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.
As new guidance and clarifications are issued we will share them with you to help advise your organization. We invite you to subscribe to our MCB Blog, so you will receive an email notification when a new blog article is posted to our website. Please contact us with any questions. We look forward to continuing to serve you.
We will continue to update you as we get more information on Coronavirus legislation and guidance that may impact you. If you have more questions contact an MCB Advisor at 703-218-3600 or click here.
The information contained within this communication is provided for informational purposes only and is not intended as a substitute for obtaining accounting, tax, or financial advice from a certified professional. Continue to check back here for the most up to date tax information and changes in response to Coronavirus.
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