Non-profit organizations affected by the COVID-19 pandemic can take advantage of the unprecedented assistance available under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020. The CARES Act provides $2.2 trillion in emergency aid to ease the financial impact of the COVID-19 crisis on individuals and businesses, including non-profits.
Here are highlights of certain benefits available to non-profits under the CARES Act.
The Paycheck Protection Program
The Paycheck Protection Program (“PPP”) administered by the Small Business Association (“SBA”) provides new loan opportunities for certain non-profit organizations. Although non-profits have historically been excluded from SBA loans, a non-profit that qualifies as a tax-exempt organization under Section 501(c)(3) or as a veterans’ organization under Section 501(c)(19) of the Internal Revenue Code of 1986, as amended (the “Code”), which was in existence on February 15, 2020 and together with its affiliates has 500 or fewer employees, may qualify for a PPP loan if it meets certain criteria and certifies that the PPP loan is necessary for the organization to maintain operations in the current economic climate and that the loan proceeds will be used to maintain payroll, retain employees, or make mortgage, lease and utility payments. The maximum amount of the loan is the lesser of (i) $10,000,000 and (ii) the sum of (A) 2.5 times the borrower’s average monthly payroll costs during the past year and (B) any prior outstanding loan amount received on or after January 31, 2020.
Additionally, PPP loans will be eligible for forgiveness. The maximum amount eligible for forgiveness is equal to the sum of amounts paid during the 8-week period beginning on the date of the origination of the loan for (i) payroll costs, (ii) interest on covered mortgage obligations and (iii) covered rent and utilities obligations, but at least 75% of PPP loan proceeds must be used for payroll costs. The loan forgiveness amount will be decreased if the organization reduces (a) the number of employees in its workforce and/or (b) compensation in excess of 25% for individuals making less than $100,000 per year.
Borrowing under this section of the CARES Act disqualifies the non-profit from taking advantage of the employee retention tax credits described below. In addition, if the non-profit’s loans are forgiven, it will be disqualified from deferring its share of social security taxes, as detailed below. However, PPP loan forgiveness amounts will not be considered gross income, and therefore will also be excluded from “unrelated business taxable income” (“UBTI”).
Further details on PPP loans and the related SBA interim final rule and clarification on the affiliation rule can be found here, here and here. The U.S. Treasury has also issued guidance on the PPP, which can be found here. The PPP Loan Application has been made available by the SBA, who began accepting completed applications on Friday, April 3rd. With a large number of organizations expecting to qualify for PPP loans, we recommend that eligible non-profits prepare and submit the application as soon as possible.
Economic Injury Disaster Loans
The Economic Injury Disaster Loan (“EIDL”) program is a financial assistance program run by the SBA. Traditionally, EIDLs have been reserved for businesses that suffer economic harm due to a natural disaster, such as a hurricane. From January 31, 2020 to December 31, 2020, the CARES Act expands the eligibility for EIDLs to non-profits that qualify as tax-exempt organizations under Section 501(c) of the Code, trade associations, advocacy organizations, unions, social clubs and certain cooperative hospital service organizations that qualify for tax-exemption under Section 501(e) of the Code that are struggling due to the COVID-19 pandemic. The EIDL program provides up to $2 million in loans per borrower to help pay debts, accounts payable, payroll, and other bills that cannot be paid because of the impact of COVID-19. During this period, the CARES Act waives the standard EIDL requirement of personal guarantees on advances and EIDLs under $200,000, and the requirements that the organization commenced operations at least one year prior to the disaster and first sought credit from another source. In addition, the CARES Act permits the SBA to approve and offer EIDLs based solely on the applicant’s credit score.
Unlike with a PPP loan discussed above, a borrower receiving an EIDL may take advantage of the employee retention tax credits available under the CARES Act, as detailed below.
In addition, the CARES Act establishes an emergency grant for EIDL applicants harmed by the COVID-19 pandemic that allows eligible non-profits to request up to a $10,000 advance against the EIDL. The SBA will approve the advance based on the non-profit’s submission of a certification under penalty of perjury that the non-profit is eligible for the advance. Importantly, if the non-profit’s advance is approved, the non-profit will not be required to repay the advance, even if the non-profit is later denied the EIDL. Furthermore, since the advance is meant to quickly provide cash to struggling organizations, the CARES Act requires the SBA to distribute the advance within three days of the non-profit’s submission of its application. The EIDL application can be found here.
Loan Opportunities for Mid-Sized Non-Profits
The CARES Act requires the U.S. Treasury to implement a program that provides financing to banks and other lenders that make available low-interest (not higher than 2% per annum) loans to non-profits with between 500 and 10,000 employees for which no principal or interest is payable for the first six months (or longer, if the U.S. Secretary of the Treasury (the “Secretary”) so determines).
An eligible mid-size non-profit applying for a direct loan under this program will be required to make good faith certifications that (1) the funds it receives will be used to retain at least 90% of the borrower’s workforce, at full compensation and benefits, until September 30, 2020; and (2) the borrower intends (i) to restore not less than 90% of its workforce that existed as of February 1, 2020 and (ii) to restore all compensation and benefits to its workers no later than four months after the termination date of the public health emergency declared in response to COVID-19. In addition, the borrower will be subject to compensation and severance limits for employees who were paid more than $425,000 in 2019 and additional limits for employees paid more than $3,000,000 in 2019. There are also limits on the organization’s ability to reduce its workforce by more than 10%. For further details on compensation and severance limits under the CARES Act for mid-sized non-profits, please click here.
Further, any eligible organization, including a mid-size non-profit, will be required to certify (to the extent relevant) that it (i) is domiciled in the United States with significant operations and employees located in the United States; (ii) is not a debtor in a bankruptcy proceeding; (iii) is created and organized in the United States, has significant operations in the United States, and has a majority of its employees based in the United States; (iv) will not pay dividends with respect to common stock, or repurchase an equity security of the borrower or any parent company of the borrower while the direct loan is outstanding; (v) will not outsource or move jobs offshore for the term of the loan plus two years after repayment; (vi) will not abrogate any existing collective bargaining agreement for the term of the loan plus two years after repayment; and (vii) will remain neutral in any union organizing effort for the term of the loan.
The CARES Act also creates new tax benefits and modifies certain existing tax provisions applicable to non-profits. These benefits take the form of tax deferrals, deductions and credits. An overview of the relevant tax provisions of the CARES Act is provided below. A more comprehensive explanation of the changes to the tax code made by the CARES Act can be found here.
Payroll Tax Deferral
Under the CARES Act, all employers (except employers who have loans forgiven pursuant to the PPP), including non-profits, regardless of size, may defer a share of the employer portion of social security tax payments that would otherwise be due between March 27, 2020 and December 31, 2020. This new deferral essentially operates as an interest free loan from the U.S. government until the deferred payroll tax becomes due. Any deferred payroll tax must be paid over the following two years, with 50% of the deferred tax payable by December 31, 2021, and the other 50% payable by December 31, 2022.
Enhanced Charitable Giving Incentives
While tax credits and tax deferrals created through the CARES Act will play an important role in supporting non-profits’ operations, the CARES Act also provides significant taxpayer incentives for charitable giving that are intended to stimulate public support of non-profits.
Prior to the CARES Act, individual taxpayers who itemize deductions were limited to a deduction equal to 60% of their federal adjusted gross income for cash contributions made to qualified charities. The CARES Act provides additional incentives for charitable giving and creates an attractive temporary income tax planning tool by permitting taxpayers to elect to completely suspend this limitation for cash contributions made to qualified charities during 2020. The CARES Act does not change the existing deduction limitations, however, for non-cash contributions and cash contributions to non-qualified charities such as donor-advised funds, most private non-operating foundations, and Section 509(a)(3) supporting organizations.
Corporations can similarly elect to increase their deduction limitation for such contributions from 10% to 25% of the corporation’s taxable income.
In addition, for charitable contributions of food inventory to a non-profit from a taxpayer’s trade or business made during 2020, the charitable deduction limitation is increased from 15% to 25% of the taxpayer’s taxable income.
For individual taxpayers who do not itemize deductions and would not otherwise receive a tax benefit for a charitable contribution, the CARES Act creates a new and seemingly permanent above the line deduction of up to $300 (in addition to the standard deduction) for cash contributions made to qualifying charities.
Employee Retention Tax Credits
The CARES Act also creates an employee retention tax credit for organizations of any size, including non-profits, that are negatively affected by the COVID-19 pandemic. Specifically, eligible organizations are allowed a refundable payroll tax credit against applicable employment taxes for each calendar quarter in an amount equal to 50% of qualified wages (up to $10,000 in wages) for each employee (i.e., not more than $5,000 of credit per employee per quarter). This credit may not exceed the applicable employment taxes (reduced by any credits allowed for paid family leave or paid sick leave under the Families First Corona Virus Response Act (the “Response Act”)) on the wages paid for all employees during the calendar quarter. If the credit amount would exceed this limitation for any calendar quarter, the excess will be treated as an overpayment and refunded to the organization. Furthermore, organizations that receive a PPP loan (whether or not forgiven) will not be eligible to benefit from the employee retention tax credit.
Employers eligible for the employee retention tax credit include any organization that: (i) carries on operations during calendar year 2020, and (ii) suffers full or partial suspension of its operations, with respect to any calendar quarter, due to orders from an applicable governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the COVID-19 pandemic.
For non-profits with more than 100 full-time employees, on average, during 2019, the credit is available only for wages paid to employees who are not providing services to the employer due to a COVID-19-related suspension of operations. For non-profits with 100 or fewer average full-time employees during 2019, all wages paid qualify for the credit, whether the employer is operating or subject to a shut-down order. Regardless of employee count, qualified wages will not include wages taken into account for the purposes of payroll tax credits corresponding to paid family leave or paid sick leave under the Response Act (for further discussion on the Response Act, please click here). Additionally, qualified wages include qualified health plan expenses incurred by the eligible non-profit (to the extent such amounts are excluded from the gross income of employees). The employee retention tax credit is available for wages paid from March 13, 2020 through December 31, 2020.
Penalties for failing to make a tax deposit of applicable employment taxes will be waived if the Secretary determines that any such failure is due to a reasonable anticipation of the employee retention tax credit.
Other Tax Provisions
Changes in the CARES Act to other tax provisions could also be applicable to non-profit organizations with UBTI. For example, organizations with losses from unrelated trade or business activities conducted in 2018, 2019, and 2020 could benefit from the changes in the rules governing a business’s ability to deduct net operating losses (“NOLs”), by allowing such organizations potentially greater utilization of such NOLs as well as the ability to carry back such NOLs to prior years and apply for tax refunds. Further, the changes to the “alternative minimum tax” (“AMT”) credits rules and the acceleration of such refundable AMT credits could benefit non-profit organizations with UBTI, that were previously subject to AMT, and could allow them to obtain additional cash flow during the COVID-19 crisis.
Generally, a non-profit organization that elects to self-insure employment reimbursements, rather than pay a state unemployment insurance tax, must repay the state for any unemployment benefits claimed by the non-profit’s former employees. With layoffs increasing due to the COVID-19 crisis, the CARES Act provides that self-insured non-profits will be reimbursed for one-half of the costs of the unemployment benefits provided (for any reason) from March 13, 2020 through December 31, 2020.
Further information on the CARES Act and how it relates to non-profit organizations can be found here.
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