On March 27th the president signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The very important Act not only addresses the needs of individuals, small business and large corporations, but also provides valuable economic tools to help most nonprofits wade through this unprecedented time.
The Act defines a nonprofit organization as “an organization that is described in section 501(c)(3) and 501(c)(19) of the Internal Revenue Code of 1986 and that is exempt from taxation under section 501(a) of such Code.”
Therefore, the CARES Act is applicable to most charitable tax-exempt entities, while leaving other nonprofits out, including governmental entities and municipalities. There are some exceptions to this exclusion as noted below.
Disaster Funding for Small – Midsized Nonprofits
The key provision of the act as it relates to providing fiscal relief for small and medium size businesses is the Paycheck Protection Program (PPP). The PPP is a $350 billion program designed to provide fiscal relief to businesses who employ 500 or fewer employees and have been affected by COVID-19. In an unprecedented move, nonprofits have been included as recipients of the relief.
The intent of the program is to provide nonprofits with funding to pay your business’s payroll costs, rent, loan interest and utilities for eight weeks. This relief begins as a loan issued by a financial institution, and then the balance is forgiven as long as the proceeds have been used to pay for qualified expenses.
While there is not a bright line test to determine if a business was affected by COVID-19, the primary qualifier is that the borrower must make a “good faith certification”:
- That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower
- That the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments
- That the borrower does not have an application for a loan for the same purpose and duplicative of amounts applied for or received under a covered loan
Also available to the nonprofits under this legislation is the emergency Economic Injury Disaster Loan (EIDL) grants. These loans are available to private nonprofits including private foundations, 501(c)(4) social welfare organizations and 501(c)(6) trade and professional organizations.
A more detailed analysis of the SBA 7(a) and EIDL loan programs can be found here.
Lending for Large Nonprofits
In order to assist organizations with more than 500 employees, the Act calls for the establishment of loans and guarantee programs through the new Industry Stabilization Fund specifically targeting organizations with 500 – 10,000 employees.
This loan program does not contain a forgiveness provision like the SBA program, but it does cap the interest rate at no higher than 2%, and that interest would not accrue in the first six months. Those entities that take advantage of this program will be expected to retain or rehire at least 90% of their staff at their full-time compensation level.
In developing the CARES Act, Congress recognized the need to stimulate funding for nonprofit organizations. First, the ACT allows a $300 “above-the-line” deduction for charitable contributions, allowing individuals who do not typically itemize to take advantage of the tax deduction.
Furthermore, the limitations of deductibility of charitable giving have been temporarily decreased. For individuals, this limitation of 60% of adjusted gross income has been temporarily removed. For corporations, the limitation has increased to 25% of taxable income. For contributions of food inventory, the limitation has been increased from 15% to 25% of taxable income.
Employee Retention Payroll Tax Credit
The CARES Act created another incentive for nonprofits designed to encourage employers to retain their employees despite potential closures and revenue shortages.
According to a summary from the Senate:
“The provision provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, OR (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.”
Notably, wages should not be double counted with another tax credit, and if the nonprofit is the recipient of the above-mentioned SBA 7(a) loan, the organization would not be eligible for this credit.
Deferral of Certain Payroll Tax Payments
Under the provisions of the CARES Act, tax exempt organizations may defer the employer share of Social Security tax with respect to their employees. The tax deferred should be paid back over a two-year period with 50% of the balance due by December 31, 2021 and the remaining 50% due by December 31, 2022.
Employers who take advantage of the loan forgiveness feature of the SBA 7(a) loan would not be eligible for this deferral.
Emergency Unemployment Relief for Nonprofits and Governmental Entities
According to a summary from the Senate:
“This section provides payment to states to reimburse nonprofits, government agencies, and
Indian tribes for half of the costs they incur through December 31, 2020 to pay
The emergent changes to unemployment under the CARES Act are quite extensive and can be very beneficial to both employers and employees in maintaining financial security during this time. A more detailed breakdown of these provisions can be found here.
Warren Averett will continue to monitor and provide updates on these and other important provisions of the CARES Act. If you have any questions about how this will affect your employees, please contact your Warren Averett advisor or complete this form to have a member of our team reach out to you.
This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor and also consult with your lender regarding your situation. Please note that Warren Averett is not an Agent under the Paycheck Protection Program loan program (“PPP”). Warren Averett does not provide loan packaging services or guarantee qualification under the PPP or any loan administered by the U.S. Small Business Administration 7(a) loan program.