Not-for-profit organizations have been hit hard by the COVID-19 pandemic. Shelter-in-place orders have dwindled physical participation in religious and cultural activities while forcing charitable organizations to either suspend or heavily curtail operations. Financial pressures including declines in contributions, investments, and endowment balances will need to be addressed by organizational leadership so that your operations can be managed through these uncertain times. Recent pandemic-related stimulus legislation may provide some much needed resources—and stability—during this time. The following five benefits from the Coronavirus Aid, Relief, and Economic Security (CARES) Act are particularly beneficial for not-for-profit organizations.
Specialized Financing Vehicles and Forgivable Loans
The CARES Act enhanced Small Business Administration (SBA) loans and created the Paycheck Protection Program (PPP), which offers a forgivable loan that organizations with 500 or fewer employees can use to help with payroll costs. The first round of funding has been fully distributed. The President signed legislation on April 24 providing additional coronavirus relief funding to the PPP. It is meant to bridge the gap between the CARES Act funding and the next round of coronavirus legislation.
PPP loans come with a maximum allotment equal to the smaller of $10 million or 2.5 times the average monthly payroll over the previous 12 months. Loans can be forgiven if used during the eight week period subsequent to the loan date (but not after June 30, 2020) for certain allowable costs. Payroll costs are one of the allowable costs and include salaries and wages, paid time off, group health benefits, retirement benefits, and state and local taxes, subject to a $100,000 cap per employee. Other costs outside of payroll such has continuation of health benefits, mortgage interest, rent and utilities, and interest on debt that was originally incurred prior to Feb. 15, 2020 also are among the allowable costs, although these other costs are subject to certain caps. The standard application can be found here and further details regarding program components are here.
Not-for-profit organizations can apply for a PPP loan through a SBA-approved lender. They will need to certify that the loan will support ongoing operations, such as maintaining employees and payroll, and making rent or utility payments. Retention of staff during the eight-week relief period is required for complete forgiveness of the loan. Organizations should be advised that once a PPP loan is forgiven, other provisional relief under the CARES Act is no longer available, such as the payroll tax holiday.
Another funding option to consider is the Main Street Lending Programs (MSLP). The program will operate through two facilities: the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). It will be available to organizations with up to 10,000 employees or business whose 2019 revenue was $2.5 billion or less. The four-year loans feature a minimum loan amount of $1 million and a maximum of $25 million. The interest rate uses the Secured Overnight Financing Rate (SOFR) plus 250-400 basis points, with principal and interest payments deferred for one year.
The two programs either facilitate new loans or build on existing MSLP loans. Organizations applying for MSLP loans must commit to maintaining payroll and workers, and have restrictions on how much of that loan can be put toward executive compensation. More information can be found here.
Deferral of Tax Liability
The CARES Act provides a payroll tax holiday, which allows deferment of the employer portion of Social Security payroll tax liability from March 27, 2020 to Dec. 31, 2020. Half of the deferral must be paid by the end of 2021 with the remaining portion paid by the end of 2022. Organizations that have loans forgiven under the PPP cannot take advantage of the payroll tax holiday subsequent to the date that they are notified of forgiveness.
Employee Retention Tax Credit
Employers that did not take advantage of the PPP under the SBA will be able to apply for a payroll tax credit that incentivizes the retention of employees. The credit covers employee wages paid after March 12, 2020 through the end of the year. Eligible employers are those whose gross receipts declined by more than 50% or had to fully or partially suspend operations. The credit will be claimed on the employers’ payroll tax returns. Employers that received a PPP loan are not eligible for the retention credit, regardless of whether any of the PPP loan is forgiven.
Under the CARES Act, organizations subject to the unrelated business income tax that have losses incurred in 2018 through 2020 may carry back those net operating losses (NOLs) to the preceding five years, and may fully offset income in those carryback years. This CARES Act provision temporarily restores the ability to carry back NOLs, and allows a six-month extension to file quick refund NOL forms. Under the six-month extension, quick refund claims must be filed before June 30, 2020 to ensure expedient processing.
Benefits for Donations
Several changes under the CARES Act may make charitable contributions more appealing. Individuals who do not itemize their taxes can take a $300 above-the-line deduction for cash contributions to a qualifying not-for-profit organization in 2020. For individuals who itemize, the charitable deduction is increased to 60% of an individual taxpayers’ AGI through 2025. Corporations also can take deductions up to 25% of taxable income for cash deductions (up from 10%), and deductions for contributions of food inventory up to 25% of taxable income (up from 15% of taxable income).
For More Resources
We are here to help you understand how the CARES Act can help your organization continue to serve your primary exempt purpose. For more information about how the CARES Act affects your organization, please contact us.
Looking for more COVID-19 resources? Visit our resource center for expertise on impacts to expect and how your business can respond.
Amy O’Loughlin is a Tax Director and member of the Not-For-Profit Practice. She is located in the CBIZ Phoenix office. She can be reached at AOloughlin@cbiz.com or 602.650.6233.