When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March, much attention was paid to Economic Impact Payments for individuals and various types of assistance for businesses. But the 880-page law also contains some assistance that could prove critical to nonprofits as they struggle to deal with the financial impact of the novel coronavirus (COVID-19) pandemic.
Paycheck Protection Program
Charitable and veterans nonprofits (501(c)(3) and 501(c)(19) organizations) with 500 or fewer employees are among the organizations that qualify for the Paycheck Protection Program (PPP) through the Small Business Administration (SBA). The SBA is waiving its normal requirements, and the two-year, low-interest loans are subject to 100% forgiveness if certain requirements are met. These funds must be used for payroll and other specified expenses.
The program was set up on a “first-come, first-served basis,” and the first round of funding was claimed in less than two weeks. On April 24, President Trump signed legislation that provides $310 billion in additional funding. That includes $60 billion designated for smaller lenders, such as community banks and credit unions, with the aim of helping smaller organizations without existing relationships with big banks. But it’s still possible the program could be out of money by the time you’re reading this.
The CARES Act also expands the existing SBA Economic Injury Disaster Loan (EIDL) program to give certain small businesses an immediate $10,000 advance upon applying for the EIDL loan. If the loan application is denied, the applicant keeps the advance as a grant. The SBA has simplified the application process and relaxed credit standards.
The program also is available to “private nonprofit organizations,” including 501(c)(3) groups, trade associations, advocacy organizations, unions, social clubs and faith-based organizations. You can use EIDL funds for paid sick leave, payroll, mortgage, rent and other debts, and increased costs due to disrupted supply chains.
Unlike PPP loans, these loans must be repaid. The interest rate for nonprofits is 2.75%, and you may be eligible to receive as much as $2 million. Repayment periods up to 30 years are determined on a case-by-case basis. Payments are automatically deferred for one year on COVID-19-related loans.
Like the PPP, the EIDL program quickly ran out of money and was bolstered by the CARES Act amendments, which added $50 billion in loans and $10 billion in grants. This program may also be out of money by the time you’re reading this.
The CARES Act also creates an Industry Stabilization Fund to provide direct loans to organizations, including qualifying nonprofits, with between 500 and 10,000 employees. It mandates an interest rate of no more than 2%, with no interest accrual or repayments for the first six months. Recipients must retain or rehire at least 90% of their workforce at full compensation and benefits.
Retention tax credits
To help employers keep their workforces intact, the CARES Act establishes a new refundable credit against payroll tax. The credit is available to employers whose:
- Operations were fully or partially suspended due to a COVID-19-related governmental shutdown order, or
- Gross receipts fell more than 50% compared to the same quarter in the previous year.
Employers, including 501(c) organizations with more than 100 employees, are eligible for the credit for employees not providing services (or whose hours have been reduced) because of the aforementioned suspension of operations or reduction in gross receipts. Those with 100 or fewer employees can qualify for the credit whether or not employees are providing services.
The credit equals 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through Dec. 31, 2020. Note that employers that receive a PPP loan aren’t eligible for the retention tax credit, and other rules and limits apply.
Payroll tax and unemployment benefit relief
The CARES Act permits you to delay your payment of the employer share (6.2% of wages up to the annual wage limit) of the Social Security payroll tax, so long as you haven’t had debt forgiven through the PPP. You can pay the tax over the next two years, with the first half due by Dec. 31, 2021, and the second half due by Dec. 31, 2022.
Certain nonprofits will receive reimbursement for 50% of the costs incurred from March 13, 2020, through Dec. 31, 2020, to pay unemployment benefits. The benefit applies to organizations that reimburse their states for benefits paid to former employees, rather than pay unemployment taxes.
All the programs described above come with pros, cons and requirements. And more programs may become available. Your CPA can help you evaluate your options.
Expanded tax deductions for charitable contributions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily expands charitable contribution deductions.
Individual taxpayers can take advantage of a new $300 deduction for cash contributions to qualified charities in 2020. The deduction is “above-the-line,” so taxpayers can claim it without having to itemize their deductions.
The CARES Act also loosens the limitation on charitable deductions for individuals’ cash contributions made in 2020, boosting it from 60% to 100% of adjusted gross income.
The deduction limit for businesses rises from 10% to 25% of taxable income. The law also increases the limitation on deductions for contributions of food inventory from 15% to 25%.