The CARES Act: Impact on Charitable Organizations
Tax-Exempt Organizations Alert 04/01/20 Patricia S. Marx
President Trump signed into law “phase III” legislation to address the nation’s COVID-19 emergency on Friday, March 27, 2020. The legislation, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), is over 850 pages long and consists of a wide variety of stimulus and support measures for individuals, businesses, state and local governments, and particular industry sectors—with an estimated total cost of $2 trillion.
This alert addresses, at a high level, certain provisions of the CARES Act potentially applicable to the nonprofit sector broadly. The CARES Act also includes a number of relief measures directed to specific subsectors, such as healthcare, education, the arts, and social services, which are not addressed here.
Paycheck Protection Program
Certain “nonprofit organizations” are among those eligible to receive forgivable emergency small business loans (“covered loans”) under the Paycheck Protection Program, which is administered by the Small Business Administration (the “SBA”). An eligible nonprofit organization for these purposes is one that meets the following requirements:
- is described in section 501(c)(3) of the Internal Revenue Code (the “Code”) (i.e., not a section 501(c)(4) or 501(c)(6) organization, even if a “nonprofit” corporations under state law);
- has 500 or fewer employees (including employees of certain affiliates);
- was in operation on February 15, 2020;
- either (i) has employees to whom it has paid wages and on behalf of whom it has paid payroll taxes or (ii) has paid independent contractors; and
- is able to certify that the loan is necessary to support ongoing operations and that it will use the covered loan funds for a permitted use (as described further below).
The maximum amount of a covered loan is the lesser of $10,000,000 and 2.5 times average monthly “payroll costs”. Covered loans are available from February 15, 2020, to June 30, 2020, and may be used for the following purposes:
- payroll costs (including salaries, wages, cash tips; vacation; family, medical, or sick leave; healthcare; retirement; and payroll taxes; but not compensation in excess of $100,000 per year per individual or compensation paid to an employee with a primary residence outside the U.S.);
- costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- employee salaries, commissions, or similar forms of compensations;
- payments of interest on any mortgage obligation;
- rent (including rent under a lease agreement);
- utilities; and
- interest on any other debt obligations that were incurred before February 15, 2020.
Payments of principal, interest, and fees on covered loans are automatically deferred for 6–12 months.
These loans are forgivable to the extent they are used for payroll costs, mortgage interest, rent, or utility payments in the eight weeks after loan origination. However, the amount subject to forgiveness is reduced if, between February 15, 2020, and June 30, 2020, the nonprofit reduces the number of full-time employees or reduces wages below a certain threshold. Nonprofits that have reduced workforce or wages prior to 30 days after enactment but subsequently rehire employees or eliminate wage reductions by June 30, 2020, may be able to cure the forgiveness limitation.
A more extensive description of the Paycheck Protection Program is available here and here. Applications for loans will be accepted beginning on April 3, as discussed here (including a link to the application form).
Emergency Economic Injury Disaster Loans
The CARES Act also includes modifications to the SBA’s economic injury disaster loan (“EIDL”) program to expand access to EIDLs and to reduce the time it will take to obtain EIDL funding. Nonprofit organizations generally are among those entities eligible to receive EIDLs—up to $2,000,000 at a 2.75 percent interest rate.
In the interest of quickly providing much-needed capital to eligible organizations, an EIDL may be approved based on an organization’s credit score or by some alternative method to gauge an organization’s ability to repay. In addition, the CARES Act waives certain requirements under the EIDL program, including: (a) for loans up to $200,000, the requirement for a personal guarantee; (b) that an organization be in business for at least one year (though it must have been in operation on January 31, 2020); and (c) that an organization demonstrate that it is unable to obtain credit elsewhere.
An organization may receive an advance of up to $10,000 within three days of the SBA’s receipt of an application, subject to verification that the entity is eligible under this program. If the SBA ultimately rejects the application, the applicant may retain the $10,000 advance without needing to repay it. An EIDL may be used for any of the purposes permitted under the Paycheck Protection Program described above (e.g., payroll, mortgage payments, rent, utilities).
A more extensive description of the expanded EIDL program is available here.
Charitable Giving Incentives
The CARES Act includes provisions that are intended to provide enhanced charitable giving incentives to all taxpayers.
For individual taxpayers, the CARES Act permits all taxpayers (not just those who itemize) to take an above-the-line deduction of up to $300 for “qualified charitable contributions” made in taxable years beginning in 2020. A “qualified charitable contribution” means a charitable contribution (as defined in section 170(c) of the Code) made in cash for which a deduction is allowable under section 170 of the Code, and which is made to an organization described in section 170(b)(1)(A) of the Code (e.g., churches, educational organizations, hospitals, governmental units, certain publically supported charitable organizations). Noncash contributions and contributions to any of the following types of organizations do not qualify: (i) private non-operating foundations, (ii) “supporting organizations” described in section 509(a)(3) of the Code, and (iii) donor advised funds.
Perhaps more importantly, the CARES Act lifts, for 2020, the existing cap on charitable contribution deductions for individuals who itemize. An individual may deduct qualified charitable contributions (as described above) up to 100 percent of his or her adjusted gross income (less the amount of other allowable charitable contributions for the year). A corporation generally may deduct up to 25 percent of its taxable income (up from 10 percent). Taxpayers must elect the application of this special provision for such qualifying contributions—and presumably the Internal Revenue Service will issue guidance or revised forms with respect to such elections. The CARES Act also increases the amount a corporation may deduct for certain donations of food inventory during 2020 from 15 percent to 25 percent.
Employee Retention Payroll Tax Credit
The CARES Act provides eligible employers, including tax-exempt organizations, with a refundable credit against payroll tax liability equal to 50 percent of the first $10,000 in wages per employee (including certain qualified health plan expenses). An eligible tax-exempt employer is one that has carried on operations during 2020 and meets either of the following tests:
- during any calendar quarter, its operations are fully or partially suspended due to orders from a governmental entity limiting commerce, trade, or group meetings due to COVID-19; or
- it experiences a year-over-year reduction in gross receipts of at least 50 percent, until gross receipts exceed 80 percent year-over-year (based on calendar quarters).
For employers of more than 100 full-time employees, the credit is available only for wages of those employees not providing services for the employer due to the above-described circumstances (i.e., government-ordered shutdowns or year-over-year declines). For other employers, the credit is available for all wages paid during the above-described periods (i.e., the applicable calendar quarters). The credit is available for wages paid after March 12, 2020, and before January 1, 2021. Excess credits are refundable.
Partial Unemployment Relief for Self-Funded Nonprofits
During the period from March 13, 2020, through December 31, 2020, the federal government will transfer to the various state unemployment funds an amount equal to 50 percent of the cost of providing unemployment benefits to laid-off employees of nonprofits that “self-fund” their unemployment obligations. Such amounts are to be used exclusively to reimburse such nonprofits.
Industry Stabilization Fund
The CARES Act sets aside $425 billion for loans, loan guarantees, and other investments in support of facilities established by the Federal Reserve to support lending to “eligible businesses”, states, or municipalities. The program is administered by the Treasury Secretary, who is required to publish application procedures and minimum requirements for loans, loan guarantees, and other investments within 10 days of enactment of the CARES Act.
U.S. “nonprofit organizations” with between 500 and 10,000 employees are expressly included among eligible businesses, provided they have not otherwise received economic relief in the form of loans or loan guarantees provided under the CARES Act. (The term “nonprofit organizations” is not defined for these purposes, so the precise scope of eligibility is unclear, though section 501(c)(3) organizations that otherwise qualify presumably would be eligible.) Loans to such nonprofits are not forgivable, but interest is capped at two percent, and no interest or principal payments will be due for at least six months. Recipients must make a good-faith certification as to a number of matters, including that the uncertainty of economic conditions makes the loan necessary to support ongoing operations; the recipient will retain at least 90 percent of its workforce at full compensation and benefits until September 30, 2020 (and restore at least 90 percent of its workforce existing as of February 1, 2020, no later than four months after the termination date of the COVID-19 public health emergency); the recipient will not outsource or offshore jobs during the loan or for two years after repayment; and the recipient will not abrogate existing collective bargaining agreements and will stay neutral regarding union organizing activity.
A more in-depth discussion of the industry stabilization fund and related provisions of the CARES Act is available here.
Other Notable Provisions
- Direct Payments: The CARES Act provides for up to $1,200 per adult (and $500 per child), in direct support payments to individuals, which phases out with income of $75,000 or more ($150,000 or more for married couples).
- Expanded Unemployment Insurance: The CARES Act provides for an additional $600 per week payment to recipients of state unemployment benefits for up to four months and extends unemployment insurance to self-employed workers, independent contractors, and those with limited work history, among other provisions.
- Amendments to New Paid Leave Mandates: As discussed in more detail here, the Families First Coronavirus Response Act signed into law on March 18, 2020, generally requires employers with fewer than 500 employees to provide twelve weeks of paid family and medical leave for employees unable to work (or telework) due to a need for leave to care for a child because of COVID-19 and two weeks of paid sick leave for certain COVID-19-related illness or quarantine. The CARES Act lowers the amounts that employers must pay for such paid sick and family leave to the amounts covered by the refundable payroll tax credit discussed above—i.e., $511 per day for employee sick leave and $200 per day for family leave.
- Student Loan Payments: Certain employer payments of student loans on behalf of employees are excluded from taxable income.
- Net Operating Losses (NOLs): The 80-percent-of-taxable-income limit on NOLs (enacted as part of the Tax Cuts and Jobs Act) is suspended for 2018, 2019, and 2020; and NOLs arising in such years may be carried back five years. This relaxation of the NOLs provisions may benefit tax-exempt organizations with prior- or current-year unrelated business taxable income (UBTI) or losses. The CARES Act does not appear to impact the UBTI “siloing” rules also enacted as part of the Tax Cuts and Jobs Act.
- Acceleration of AMT Credits: The Tax Cuts and Jobs Act also repealed the corporate alternative minimum tax (AMT) regime and provided that AMT credits could be claimed over a period of years ending in 2021. The CARES Act generally permits any AMT credits to be claimed immediately, which could be beneficial for tax-exempt organizations with prior-year AMT credits resulting from UBTI.
Quarles & Brady continues to monitor COVID-19 developments closely, including analyzing other provisions of the CARES Act and monitoring guidance from federal, state, and local governments on the unfolding situation. We encourage you to check here or with your Quarles & Brady attorney for any future developments.
This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact your Quarles & Brady attorney or: