Not-for-profit organizations are navigating financial hardship and uncertainty caused by the COVID-19 pandemic. Fortunately, there are now numerous options available to ease these unprecedented situations. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Families First Coronavirus Response Act (FFCRA) include several provisions that are relevant for not-for-profit organizations, including:
The applicability and impact of these provisions will vary based upon the facts and circumstances of each organization. Accordingly, please evaluate the economic impact and interplay between the provisions carefully.
Paycheck Protection Program (PPP) Loans
The purpose of a PPP Loan is to provide cash for qualifying not-for-profit organizations to continue to pay payroll, group health insurance (including premiums), rent, utilities, and interest payments on existing debt. When applying for a PPP Loan, an organization is required to certify, among other items, that the organization has been economically affected or that economic uncertainty makes the loan necessary.
Not-for-profit organizations that are tax-exempt under Internal Revenue Code (IRC) sections 501(c)(3) and 501(a) are eligible for a PPP Loan, if they otherwise meet the program requirements. Thus, a wide variety of "charitable" nonprofit organizations will be eligible, including:
- Certain educational institutions
- Research institutes
- Social service organizations
- Houses of worship
Further, veterans organizations that are tax-exempt under IRC section 501(c)(19) are also eligible for the PPP Loan program.
PPP Loans are available to qualifying not-for-profit organizations with fewer than 500 employees (with some exceptions) and generally provide:
- 2.5 times the average monthly payroll cost ($10 million maximum)
- Two-year repayment period
- 1% interest rate, with the first six months deferred
- No prepayment penalties
- No collateral or personal guarantee requirements
- Conditions for loan forgiveness
- No more than 25% of forgiveness can be for non-payroll costs.
- Full forgiveness will not be available if an organization: (a) Reduces full-time employees (FTEs) during the covered period, or (b) Reduces pay of an FTE making less than $100,000 by more than 25%.
Economic Injury Disaster Loans (EIDL)
The Economic Injury Disaster Loan (EIDL) program is a pre-existing program that received additional funding in the CARES Act. EIDLs are available to a much broader group of not-for-profit organizations than are eligible for PPP Loans. In addition, EIDLs are not subject to the same size limitations as the PPP Loans.
For the EIDL program, eligible "private nonprofit organizations" include any entity exempt under IRC section 501(c). This includes the following types of not-for-profit organizations that are ineligible for the PPP:
- Trade associations
- Advocacy organizations
- Social clubs
Organizations that are primarily engaged in lobbying or political activities are ineligible to participate in the EIDL program
The EIDL program also includes certain organizations tax-exempt under IRC section 501(d) (apostolic organizations) and IRC section 501(e) (cooperative hospital service organizations).
EIDL proceeds are required to be used to pay for employer costs such as increased paid sick leave or salaries, making rent or mortgage payments, offsetting increased supply chain costs or other repayment obligations. In general, the EIDLs provide:
- A maximum loan amount of $2 million
- An option of a forgivable grant of up to $10,000 when applying for an EIDL
- Repayment terms of up to 30 years
- 2.75% interest rate for not-for-profit organizations
- Deferrals for up to 1 year
- EIDLs of up to $200,000 can be approved without a personal guarantee
- No collateral is required for loans of $25,000 or less
Although an organization can apply for both the PPP and an EIDL, the organization should not use the loan proceeds from both programs for the same purposes. If an organization secures a PPP loan, the $10,000 EIDL grant will be subtracted from the forgiveness amount.
Economic Stabilization Funds
The CARES Act provides economic stabilization in the form of loans, loan guarantees and investments in industries affected by COVID-19. The Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF), commonly referred to as “Main Street Loans” are two such economic stabilization programs. Not-for-profit organizations that are not eligible to participate in the PPP may be eligible to participate in these Main Street Loans. Many details are still to be determined, but in general:
- The programs are suited for midsize organizations, with 500 to 10,000 employees.
- The MSNLF is available for new loans while the MSELF provides expanded terms for Main Street Loans that were originated prior to April 8, 2020.
- The terms of the loan include:
- A four-year maturity
- Amortization of principal and interest deferred for one year
- No loan forgiveness
- Adjustable rates of 250-400 basis points above the Secured Overnight Financing Rate (SOFR)
- Minimum loan size of $1 million
- Maximum loan sizes are subject to multiples of EBITDA, stated program limits, and/or debt ratios
- The loan proceeds cannot be used to repay other loan balances
- The programs require extensive certifications regarding eligibility, the use of funds, and financial position of the organization.
Employment Retention Benefits
The Employee Retention Credit is a refundable tax credit for all not-for-profit organizations that have been financially impacted by COVID-19. The refundable tax credit is equal to 50% of qualified wages paid to employees after March 12, 2020 and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000. An organization may not receive the Employee Retention Credit if it has received a PPP Loan.
The credit is available to all not-for-profit organizations that either:
- Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.
- Experience a significant decline in gross receipts during the calendar quarter.
The calculation of “qualified wages” is dependent on a number of factors and limitations, but in general:
- Includes wages and compensation paid by an eligible employer to employees after March 12, 2020 and before January 1, 2021.
- Includes the eligible employer's qualified health plan expenses that are properly allocable to the wages.
- The calculation of the amount of qualified wages depends, in part, on the average number of full-time employees employed by the eligible employer during 2019 and if that average was more or less than 100 employees.
- The amount of qualified wages for which an eligible employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
Deferment of Certain Payroll Taxes for Employers
Under the CARES Act, all not-for-profit organizations may defer the employers’ share of the 6.2% Social Security payroll tax on employee wages for the period from March 27, 2020 - December 31, 2020.
The full amount of the deferred employment tax is then required to be paid back over the following two years; 50% of the amount must be paid by December 31, 2021 and the other 50% by December 31, 2022. As long as the taxes subject to the deferral are timely deposited by the December 31, 2021 and December 31, 2022 dates, the taxes will be treated as timely deposited, thereby avoiding the significant failure to deposit penalties. Deferral of taxes may be limited in some cases. Current guidance suggests:
- Organizations who have received a PPP loan and had amounts forgiven, may no longer defer the 6.2 % of the employer’s portion of the Social Security Tax as of the date the lender of the PPP loan issues a decision to issue forgiveness. If forgiveness is granted by the lender, the employer is not required to move up the date of payment of the deferred taxes; rather, the employer may still deposit the taxes by the end of calendar years 2021 and 2022.
- This deferral may also be used along with paid leave tax credits found in the FFCRA. The organization should first determine the amount of the deferral of the Social Security taxes, and should then consider amounts for the paid leave credit, the employee retention credit, advance payments, or any refunds with respect to these credits.
Enhanced Charitable Deductions for Individuals and Corporations
The CARES Act includes provisions for individuals and corporations that may benefit organizations exempt under IRC Section 501(c)(3). The following information may be beneficial to those organizations:
- A one-time above-the-line deduction (available to taxpayers who do not itemize deductions) for cash contributions of up to $300 made to charitable or religious organizations in calendar year 2020.
- Increases the limit on the charitable contribution deduction made by individuals who itemize deductions for tax purposes. The current limit for an individual's tax deduction for charitable contributions of cash (60% of adjusted gross income) is increased to 100% of adjusted gross income for 2020.
- For corporations, the limit on charitable deductions for cash contributions in 2020 is increased from 10% to 25% of pretax income. Additionally, the CARES Act increases the limitation on deductions for food donations by corporations in 2020 from 15% to 25% of pretax income.
The individual incentives do not apply to contributions to donor advised funds, private non-operating foundations, or section 509(a)(3) supporting organizations
Expanded Unemployment Benefits
The CARES Act created expanded unemployment benefits to individuals that are fully funded by the federal government. Understanding these expanded benefits can be helpful, if a not-for-profit organization is considering a reduction of staff and the financial impact to its employees. An overview on the expanded unemployment provisions is located here.
In addition, the CARES Act includes a specific section allowing self-funded not-for-profit organizations to be reimbursed for 50% of the costs incurred through the end of 2020 to pay unemployment benefits.
Emergency Paid Sick Leave Act (EPSLA)
The FFCRA includes the Emergency Paid Sick Leave Act (EPSLA). All not-for-profit organizations with fewer than 500 employees must comply with the EPSLA. Organizations with fewer than 50 employees may qualify for an exemption only due to school, place of care, and/or childcare provider closings or unavailability due to COVID-19, if the leave payments would jeopardize the viability of the organization as a going concern.
The EPSLA applies to employees regardless of how long an employee has worked for an employer. Depending on the nature of the employee’s COVID-19 eligible sick leave circumstance, the employer is required to pay either:
- Sick leave for up to two weeks (up to 80 hours) at the greater of the employee’s regular rate of pay, or, if higher, 2/3 of the Federal minimum wage or any applicable state or local minimum wage, up to $511 per day and $5,110 in the aggregate.
- Sick leave for up to two weeks (up to 80 hours) at the greater of 2/3 the employee’s regular rate of pay or, if higher, 2/3 of the Federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.
Exceptions may exist for organizations who employ healthcare providers or emergency responders.
Qualified EPSLA wages are not subject to the 6.2% employer portion of FICA. Qualifying organizations are eligible for a fully refundable payroll tax credit equal to the required amount of paid sick leave plus the employers’ share of Medicare tax imposed on those wages and allocable costs of maintaining health insurance coverage for the employee during the sick leave period. This credit covers leave extended under the EPSLA for the period beginning April 1, 2020 and ending December 31, 2020.
Emergency Family and Medical Leave Expansion Act (EFMLEA)
The FFCRA also includes the Emergency Family and Medical Leave Expansion Act (EFMLEA). All not-for-profit organizations with fewer than 500 employees must comply with the EFMLEA. Organizations with fewer than 50 employees may qualify for an exemption, if the leave payments would jeopardize the viability of the organization as a going concern. EFMLEA exempts, under certain circumstances, employers with fewer than 25 employees from the requirement that employees who take leave are entitled to be restored to their positions.
If the school or daycare of a child of an employee is closed due COVID-19, the employee is entitled to take up to 12 weeks of job-protected leave if an employee is unable to work. The first 10 days may be unpaid (unless taken for a qualifying reason under the EPSLA or an employee chooses to take any existing pay benefit such as PTO or vacation). After the first 10 days, the employee is entitled to 10 weeks of family leave (for the hours normally worked) at 2/3 the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $10,000 in total. The amounts are capped at $2,000 for sick leave and $10,000 for the family leave for a total of $12,000 in the aggregate. The employee may elect, or the employer may require, that the employee take otherwise available vacation or PTO and the EFMEA leave concurrently.
Qualified EFMLEA wages are not subject to the 6.2% employer portion of FICA. Qualifying organizations are eligible for a fully refundable payroll tax credit equal to the required amount of paid leave plus the employers’ share of Medicare tax imposed on those wages and allocable costs of maintaining health insurance coverage for the employee during the sick leave period. This credit covers leave extended under the EFMLEA for the period beginning April 1, 2020 and ending December 31, 2020.
Due Date Extension for Forms 990, 990-T, 990-PF and Related Filings
Not-for-profit organizations have been provided tax filing relief, as outlined in Notice 2020-23, issued on April 9, 2020. Organizations that have a filing or payment deadline (originally or pursuant to a valid extension) falling on or after April 1, 2020, and before July 15, 2020, will now be granted an automatic extension to July 15, 2020. No extensions or forms will need to be filed with the IRS to obtain the relief, and the following forms are included:
- Exempt organization information returns on Form 990, Return of Organization Exempt from Tax; Form 990-EZ, Short Form Return of Organization Exempt from Income Tax; and Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ;
- Exempt organization business income tax and other payments and return filings on Form 990-T, Exempt Organization Business Income Tax Return;
- Excise tax payments on investment income and return filings on Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and
- Excise tax payments and return filings on Form 4720, Return of Certain Excise Taxes under Chapters 41 and 42 of the Internal Revenue Code.
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.