I hope you are coping as well as may be expected during these extraordinary times.
I send this email to inform you I am working from home and remain available to address pertinent legal issues that may arise as the country moves forward in addressing the COVID-19 pandemic and the steps being taken to ameliorate its disbursal and effects on all of our daily lives.
As you may know, Congress passed and the President signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress’s massive economic stimulus package. This legislation contains provisions that affect nonprofit organizations in regard to charitable contribution deduction liberalizations and the availability of loans from the Small Business Administration (SBA) that may be available to you. Below, I discuss some of these provisions.
Charitable Deduction Liberalizations
The CARES Act makes four significant liberalizations to the rules governing charitable contribution deductions:
1. Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020 regardless of whether individuals itemize their deductions. This rule effectively allows a limited charitable deduction to taxpayers who cannot itemize but who take the standard deduction.
2. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of his or her contribution base. No connection between the contributions and COVID-19 activities is required.
3. Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
4. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
These liberalized rules are intended to spur charitable contributions and should be mentioned to prospective donors as a way of persuading them to contribute in 2020, rather than postponing possible donations to 2021 and beyond.
The Cares Act provides relief to small businesses including certain nonprofits under an expanded section 7(a) SBA loan guaranty program call the Paycheck Protection Program (PPP or Program). The Program is intended to provide funds quickly to qualifying businesses. Unlike other SBA programs, the Program includes, as eligible “businesses,” section 501(c)(3) organizations and section 501(c)(19) veterans organizations (Organizations).
Paycheck Protection Program
• Organizations with 500 or fewer employees can apply for forgivable loans of up to $10 million, or up to 2.5 times average monthly payroll costs, whichever is less. Payroll costs include salaries, wages and similar modes of compensation, payment for vacation, parental, family, medical or sick leave, health care and retirement benefits, and state and local taxes on wages charged to employers (i.e., unemployment taxes). Payroll costs do not include that portion of compensation of individual employees that exceeds $100,000/year, compensation to employees outside the USA, and employee and employer share of federal income tax, Medicare, and social security (FICA) withheld during the period February 15, 2020 – June 30, 2020.
• The loans can be used to pay for salaries, wages or similar compensations and other payroll costs, healthcare benefits, interest on mortgages, rent, utilities, and interest on debt incurred from February 15 to June 30. At least 75% of the loans must be used for payroll costs.
• The portion of the loans used for the above purposes during the eight (8) week period following the issuance of the loan are subject to forgiveness. The amount subject to forgiveness is determined by the following ratio: # of employees employed during the period February 15, 2020 – June 30, 2020/ the # of employees employed during either a) from February 15, 2019 – June 30, 2019 or b) the period from January 1, 2020 – February 29, 2020. The amount forgiven will be reduced if a nonprofit fails to bring the staff size up to pre-pandemic levels or reduces the pay of any employee more than 25 percent.
• The loans may not be used to pay salaries in excess of $100,000.
• The program is retroactive so employers can rehire their recently laid-off employees through June 30 and remain eligible.
• The portions of the loans that are not forgiven are payable in two years at an annual interest rate of 1.0 percent. No payments are required for the first six months after the loan issues but interest will accrue during this period.
• The loans will be processed by most FDIC-insured banks and credit unions. The application period ends on the earlier of June 30, 2020 or until funds allocated to the Program are depleted.
• Lenders are required to consider only a few factors in evaluating loan applications, such as the necessity of a loan to survive the economic disruption caused by the coronavirus pandemic. Previous credit-seeking is not a factor, and no collateral is required.
Economic Injury Disaster Loans (EIDL)
• Nonprofits, including some faith-based organizations, are eligible for loans of up to $2 million. The interest rate for nonprofits is 2.75 percent, with terms of up to 30 years.
• Loans are based on credit scores, but no tax returns are required. Loans of up to $200,000 can be provided without a personal guarantee.
• No collateral is required for loans of $25,000 or less.
• The program includes a $10,000 emergency advance that the SBA must provide within three days to eligible nonprofits. These grants do not have to be repaid, even if the applicant is denied a disaster loan. However, anecdotal evidence suggests that the SBA is not complying with this requirement.
• The funds can be used for payroll, materials, rent, debt payments, and other expenses.
• Theses loans require applications to be made directly through the SBA.
• Nonprofits generally cannot get both Paycheck Protection forgivable loans and disaster loans for the same expenses. If an EIDL loan was awarded between January 31, 2020 and April 3, 2020, it can be converted to a PPP loan if the PPP loan is approved later. If an EIDL loan was awarded between January 31, 2020 and April 3, 2020 and was used for payroll costs the PPP loan must be used to refinance the EIDL loan.
• Proceeds from an EIDL loan up to $10,000 will be deducted from the loan forgiveness of the PPP loan.
Employee Retention Credit
• This tax credit provides a refundable payroll tax credit for the employer’s share of the Social Security Tax, i.e., 6.2% of wages, for 50 percent of wages paid during the crisis.
• Nonprofits of any size whose operations were fully or partially suspended by the coronavirus, or that saw gross receipts decline by more than 50 percent compared with the same quarter in the previous year, are eligible.
• The total wages attributed to any employee are capped at $10,000, including health benefits, so the maximum credit would be $5,000 per employee.
• The credit applies to wages paid after March 12 and before January 1, 2021, or until the organization’s revenues reach 80 percent of what they were in the same quarter of the previous year.
• Employers claim the credit when they file IRS Form 941. They can request an advance payment or refund of their payroll tax credit by submitting the new IRS Form 7200 — Advance Payment of Employer Credits Due to Covid-19.
• Any employer who receives a PPP loan is not eligible for this credit.
Payroll Tax Deferral
• Nonprofits of any size may defer payment of the 6.2 percent share of the employer’s Social Security taxes.
• The deferred taxes must be repaid over the following two years.
• Payroll taxes cannot be deferred if a nonprofit has a loan forgiven under the Paycheck Protection Program.
Anecdotally, it appears that many nonprofit organizations are experiencing difficulties participating in the Program. Recent articles in Chronicle of Philanthropy refer to nonprofit organizations finding application forms appropriate for businesses but not for nonprofit entities, local bankers who were unaware of how to proceed, and other problems. Other reports detail fears that insufficient funds in the $349 billion will be available for all organizations, including many tax-exempt organizations. It was reported on Tuesday that Congress is considering another $1 trillion dollar program that may be intended to ameliorate these concerns.
Bottom line: if you are eligible for a PPP loan, apply as soon as possible if you have not already done so.
Please contact me if you have any questions.
CAVEAT: The information set forth in this email shall not be relied upon as an opinion in regard to any particular situation and may be subject to change as interpretative guidance regarding the CARES Act is published.