The CARES Act (the Act) enacted on Friday, March 27, contains several provisions designed to provide relief for nonprofit organizations. In addition, a number of the provisions under the Act designed to help small businesses are also available to qualifying nonprofit organizations.
Relief available to a nonprofit organization under the Act varies by the type and size of the organization. Notably, certain provisions apply only to Section 501(c)(3) organizations and not to other organizations that may be exempt under Section 501(a). It is not clear how these provisions may apply to organizations that have not yet received recognition from the Internal Revenue Service (IRS) of their exemption under Section 501(a) as Section 501(c)(3) organizations. We are continuing to monitor developments in this area.
- Paycheck Protection Program (PPP) (Section 1102; Section 1106): The PPP, which is administered through local lenders by the Small Business Administration (SBA), makes $349 billion available to eligible businesses in the form of guaranteed and potentially forgivable loans.
- Section 501(c)(3) organizations, as well as veterans organizations described in Section 501(c)(19), are eligible for a loan under the PPP if the organization has 500 employees or less (or a higher head count, if applicable, based on the organization’s NAICS Code). Other nonprofit organizations are not eligible to participate.
- In determining the number of employees, the SBA’s affiliation rules include all employees of “affiliated entities” (which are generally entities that control or have the power to control the organization or that are under or potentially under common control with the organization). The Act provides that the SBA’s affiliation rules will apply to Section 501(c)(3) organizations and veterans organizations in the same manner as they apply to small business concerns. For more information about the affiliation rules, see SBA’s Guide to the SBA’s Size Program and Affiliation Rules.
- The maximum amount that may be made available under the PPP for an eligible business will be equivalent to 2.5 months of payroll costs (capped at $10 million). Borrowers may spend the loan proceeds only on payroll support (not including any compensation paid to any individual in excess of an annual salary of $100,000), such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage interest, rent, and utility and other interest payments.
- For more information about the PPP, including how to apply, see our alert here.
- Emergency Injury Disaster Loan (EIDL) Program (Section 1110): The Act expands the existing EIDL program to permit the SBA to make loans and provide emergency grants to eligible small businesses and nonprofit organizations.
- All “private nonprofit organizations” are eligible for loans and emergency grants under the expanded EIDL program. Unlike the PPP, the expanded EIDL program is not limited to Section 501(c)(3) organizations and veterans organizations.
- Under the expanded EIDL program, the SBA may make loans of up to $2 million to recipients, including nonprofit organizations, seeking relief from temporary losses following a statewide economic injury declaration, including losses they are experiencing as a direct result of the COVID-19 outbreak. EIDL loans are available to pay fixed debts, payroll, accounts payable and other bills that cannot be otherwise paid.
- In addition, the SBA has authority to make emergency grants of advance payments of up to $10,000 while an organization’s application for an EIDL loan is pending. Emergency grants do not need to be repaid, even if the application for an EIDL loan is denied.
- For more information about the EIDL program, see our alert here.
- For information about applying for the EIDL program, see here.
- Emergency Unemployment Relief (Section 2103): The Act provides for additional funds to be transferred to states from the federal unemployment account to be used solely to reimburse Section 501(c)(3) organizations, government agencies and Indian tribes for one half of amounts paid for unemployment benefits between March 13, 2020, and December 31, 2020.
- Expansion of Charitable Contribution Deductions (Sections 2204 and 2205): To encourage charitable giving, the Act expands the benefit of the charitable contribution deduction for certain “qualified” contributions. A qualified contribution is generally a charitable contribution made in cash to an organization described in Section 170(b)(1)(A). Notably, it does not include contributions to Section 509(a)(3) supporting organizations or contributions to donor advised funds.
- The Act provides an above-the-line charitable contribution deduction of up to $300 for qualified contributions made during 2020 by individual taxpayers who do not itemize deductions. Taxpayers who do not itemize deductions (which is a larger group of taxpayers after various changes under the Tax Cuts and Jobs Act) would ordinarily not receive any federal tax benefit from a charitable contribution. The above-the-line deduction does not apply to excess contributions carried forward from prior taxable years.
- The Act suspends the 50% of adjusted gross income limitation that would have applied to qualified contributions made during 2020 by individual taxpayers who itemize deductions. (The Tax Cuts and Jobs Act previously increased the limitation from 50% to 60% for 2018–2025.) For 2020, an individual taxpayer’s deductions for qualified contributions may not exceed 100% of such individual’s adjusted gross income, reduced by all other allowable charitable contribution deductions for the year. Any excess qualified contributions will be carried forward. The suspension of the limitation is not automatic; an individual taxpayer must elect for it to apply to a qualifying contribution. For partnerships and S corporations, the election is made at the partner or shareholder level.
- The Act increases the deduction limitation applicable to corporations for qualified contributions made during 2020 to 25% of taxable income (up from 10%), reduced by all other allowable charitable contribution deductions for the year. Any excess qualified contributions will be carried forward. As with individuals, the increased limitation is elective.
- The Act increases the deduction limitation applicable to contributions of food inventory made during 2020 by trades or businesses to 25% (up from 15%) of the taxpayer’s taxable income (in the case of a C corporation) or the taxpayer’s aggregate net income from such trades or businesses (in the case of other taxpayers).
- Payroll Tax Relief (Sections 2301 and 2302)
- Eligible employers, including nonprofit organizations, that have fully or partially suspended operations during 2020 due to a government order relating to COVID 19 or that suffer a greater than 50% reduction in year-over-year quarterly gross receipts (either condition is a “qualifying closure”) may be entitled to a refundable payroll tax credit created under the Act. The credit amount is 50% of the wages paid from March 13, 2020, to December 31, 2020, to employees who are not working because of the qualifying closure (with a maximum credit of $5,000 per employee). An employer with 100 or fewer employees may also claim a credit for employees who continue to work during the closure. However, an employer that receives a covered loan under the PPP is not eligible for the credit. For more information about the credit, see here.
- The Act defers the due date for the employer portion of certain payroll taxes for calendar year 2020. The deferred taxes are payable one-half on December 31, 2021, and one-half on December 31, 2022. However, employers that receive loan forgiveness under the PPP are not eligible for the deferral. For more information about this deferral, see here.
- Other Emergency Relief (Section 4003):
- The Act directs the Treasury to provide, within ten days of passage of the Act (March 27, 2020), details regarding the creation of unspecified additional programs by the Treasury and the Fed, including additional lending programs. Nonprofit organizations that are not eligible for the loan programs discussed above might be eligible for relief under these programs.
- The Act also directs the Treasury to implement a lending program targeted at businesses, including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees. Such loans will have an interest rate not higher than 2% per year and no payments will be due for the first six months. The funds received must be used to retain at least 90% of the recipient’s workforce, with full compensation and benefits, through September 30, 2020.
In addition to the programs described above, the Act contains an additional $340 billion in appropriations for state and local governments, tribal governments, government programs other organizations, and individuals, and it includes funding for science, education, human services, the arts, and many other areas. For a summary of these appropriations, click here.
Although the primary focus of this summary has been on the Act, there are other recent developments for nonprofit organizations related to the COVID-19 outbreak. We continue to monitor this area for further developments relevant to nonprofit organizations.
- Most Federal Tax Filing Deadlines for Exempt Organizations Not Extended: Recent postponements in the deadlines for making federal tax payments and filing federal tax returns apply to federal income, gift and estate taxes but not to most filings by exempt organizations, including in particular the deadlines for filing Forms 990, 990-EZ and 990 PF, which have not been postponed. The postponement does apply to Forms 990-T (Exempt Organization Business Income Tax Return) that are due to be filed on April 15, 2020, but it does not apply to Forms 990-T that are due on May 15, 2020. Organizations may still use Form 8868 to apply for an automatic six-month extension of time to file (if they have not done so already), but unless the IRS takes further action to extend the postponements to other exempt organization returns, organizations must either file a return or submit an application for extension by the regular due date (which is May 15, 2020, for calendar year organizations).