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CARES Act – Impact on Not-For-Profit Organizations

The CARES Act contains several provisions that are applicable to not-for-profit organizations.  The process for obtaining available relief will largely depend on your tax classification under Section 501(a) of the Internal Revenue Code (the Code).

For 501(c)(3) and 501(c)(19) organizations with 500 or fewer employees, including full-time and part-time employees, that have been in existence since March 1, 2020, the Act provides $350 billion of small business relief through federal backed loans called the “Paycheck Protection Program” (PPP).

The PPP broadens the usual SBA limitation, so those not-for-profit organizations that are organized under Section 501(c)(3) of the Internal Revenue code will also be included.  As defined in Section 501(c)(19), Veteran organizations are also considered eligible under the PPP.  These forms of not-for-profit organizations can receive the lesser of $10 million or 2.5 times the average total monthly payroll costs from the prior year with expedited loans of up to $1 million.  This loan can be obtained quickly through approved banks, credit unions, and some nonbank lenders.

Payments of principal, interest, and fees will be deferred for at least six months, but not more than one year, and interest rates are capped at 4%.  The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties will be waived.  No personal guarantees are required to receive funds, no collateral needs to be pledged, and this group of not-for-profit organizations are not required to show that they cannot obtain credit elsewhere.

These not-for-profit organizations must certify that:

  • The loan is necessary because of the uncertainty of current economic conditions.
  • The funds will be used to retain workers; maintain payroll; or make lease, mortgage, and utility payments.
  • The not-for-profit organization is not receiving duplicative funds for the same uses.

The loans obtained through the PPP cannot be used for compensation of independent contractors, eligible payroll costs may not include annual compensation greater than $100,000 for any individual employee, compensation of employees with a principal place of residence outside the United States, or leave wages already covered by the Family First Coronavirus Response Act.

All other types of not-for-profit organizations, such as 501(c)(4) and 501(c)(6) with 500 or fewer employees, are provided emergency financial relief under the Economic Injury Disaster Loan (EIDL) program.

The currently existing EIDL program provides not-for-profit organizations loans of up to $2 million at an interest rate of 2.75%.  Fixed debts, payroll, accounts payable, and other bills that can’t be paid due to disaster impact may be paid using these loans.  The standard EIDL program, which requires a personal guarantee that the not-for-profit organization be in operation for one year prior to the disaster and that the organization be unable to obtain credit elsewhere, has been waived.  Additionally, the SBA is now allowed to approve applicants for small-dollar loans solely based on their credit score or an alternative to determine an ability to repay.

Lastly, 501(c)(3) or 501(c)(19) not-for-profit organizations may apply for an EIDL grant in addition to a loan under the PPP.  This may be done as long as the loans are not used for the same purpose.  For not-for-profit organizations in need of an immediate influx of funds, a $10,000 emergency advance is available within three days after applying for the EIDL grant.  If the application is denied, the not-for-profit borrower will not be required to repay the $10,000 advance.  Emergency advance funds can be used for increased material costs, rent or mortgage payments, payroll, or repaying obligations that cannot be met due to revenue losses.

All entities are allowed a refundable payroll tax credit of up to $5,000 for each employee on the payroll, when certain conditions are met.  The entity must have carried on a trade or business during the 2020 calendar year, and satisfy one of the following two tests, in order to be eligible:

  • Had business operations suspended, at least partially, during the calendar quarter by order of a government authority limiting commerce, travel, or group meetings due to the pandemic.
  • Had a reduction in revenue of at least 50% in the first quarter of 2020 compared to the first quarter of 2019.

For not-for-profit organizations, the entity’s whole operations must be considered when determining the decline in revenues.  For 501(c)(3) and 501(c)(19) organizations, funds employed under the PPP loans would not be eligible for these payroll tax credits.

Benefits to Donors

The Act also provides benefits for donors to 501(c)(3) organizations.  There is a new deduction for total charitable contributions of up to $300 made by an individual taxpayer.  This is an “above the line” deduction, so all taxpayers would be eligible to take the deduction, including those who use the standard deduction.  The deduction would not apply to noncash gifts or to gifts contributed to donor advised funds.  It would apply to contributions made in 2020, and therefore would be claimed on tax forms and filings next year.

Additionally, the Act would suspend the 2020 usual limit from the existing cap on annual contributions from 50% of adjusted gross income (AGI), or 60% for cash to 100%, for those individuals who itemize their deductions.

For corporations, the annual charitable contribution limit for 2020, which is usually 10% of AGI, is increased to 25%.  Donations of food by corporations would go from 15% cap to 25%.

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