April 8, 2020 by Pamela A. Mann, Ahsaki E. Benion and Jeremy S. Steckel
Enacted on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act’’) offers relief for businesses facing economic challenges due to the outbreak of coronavirus disease (COVID–19). Certain provisions of the Act expressly extend relief to organizations exempt from taxation under the Internal Revenue Code (the “Code”) and create incentives for charitable giving.
- Modifications to Rules Governing Deductibility of Charitable Contributions: To incentivize both individual and corporate giving to charitable organizations in the wake of the COVID 19 disaster, Sections 2204 and 2205 of the Act (a) provide for a partial above the line deduction for charitable contributions, and (b) modify deductibility limits during taxable year 2020, as follows:
- For taxable years beginning in 2020, an individual taxpayer who does not elect to itemize deductions may claim a deduction from gross income of up to $300 for qualified charitable contributions made during the taxable year. A “qualified charitable contribution” is a cash contribution to a qualified charitable organization, which expressly does not include private foundations (unless an operating foundation), supporting organizations, or donor advised funds.
- An individual’s tax deduction for charitable contributions generally cannot exceed 60% of such individual’s adjusted gross income (“AGI”). The Act provides that such limit shall not apply to cash contributions made by an individual to a qualified charitable organization (as described above) during taxable year 2020. Any qualified contribution shall be allowed as a deduction to the extent that total allowed charitable contribution deductions do not exceed 100% of the taxpayer’s AGI. Contributions in excess of the taxpayer’s AGI may be carried over to subsequent tax years. In the case of a corporation, charitable contributions are generally allowed as a deduction only to the extent that they do not exceed 10% of the taxpayer’s taxable income. The Act increases the deductibility limit to 25% of a corporation’s taxable income.
- Paycheck Protection Program: Division A, Title I of the Act provides for a Paycheck Protection Program (“PPP”) to be implemented by the U.S. Small Business Administration (the “SBA”). The PPP authorizes up to $349 billion for commitments for general business loans to support job retention and cover certain expenses of business impacted by COVID-19. Section 1102 of the Act defines eligible PPP loan recipients to include exempt charitable organizations described in Code section 501(c)(3) and exempt veterans organizations described in Code section 501(c)(19). Until June 30, 2020, such organizations may receive PPP loans to cover certain qualified expenses, as follows:
- Eligibility: An exempt organization may generally be eligible to receive a PPP loan if it employs not more than 500 employees, though the allowable number may be increased by the SBA depending on the industry in which the organization operates. The term “employee” includes individuals employed on a full-time, part-time, or other basis (e.g., seasonal).
- Loan Amount: An organization may borrow an amount equal to (a) up to 2.5 times the average monthly payments for payroll costs (e.g., compensation, vacation and sick leave payments, expenses for group health care benefits, etc.) incurred by the organization during the 1-year period before the date on which the loan is made, plus (b) the outstanding amount of any SBA Economic Injury Disaster Loan (described below) made to the organization after January 31, 2020, which may be refinanced under the PPP loan. Special rules apply for seasonal businesses and organizations that were not operating during the period beginning on February 15, 2019 and ending on June 30, 2019. Payroll costs are includable up to a maximum annual salary of $100,000 for each employee, and the maximum loan amount is $10,000,000.
- Allowable Uses: PPP loans may be used to cover a variety of expenses, including but not limited to (a) payroll costs; (b) payments of interest on mortgage obligations; (c) rent; (d) utilities; and (e) interest on debt obligations incurred before February 15, 2020.
- Certification: An eligible exempt organization applying for a PPP loan is required to make a good faith certification (a) that the uncertainty of current economic conditions makes necessary the loan request to support the organization’s ongoing operations; (b) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (c) that the organization does not have an application pending for another PPP loan for the same purpose and duplicative of amounts applied for or received under the loan; and (d) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the organization has not received or will not receive amounts for the same purpose and duplicative of amounts applied for or received under a PPP loan.
- Loan Terms: No personal guarantee or collateral is required for a PPP loan, and neither the lender nor the SBA may collect a fee for the loan. The Act provides that a PPP loan shall bear an interest rate not to exceed 4 percent; the Secretary of the U.S. Treasury (the “Treasury Secretary”) has recently set the rate at 1 percent. Each PPP loan is a nonrecourse loan, meaning the SBA shall have no recourse against any individual affiliated with an eligible loan recipient unless such individual uses the loan proceeds for unauthorized purposes.
- Loan Deferment: For PPP loans to eligible exempt organizations that were operating as of February 15, 2020 and had an application for a PPP loan that was approved or pending approval on or after March 27, 2020, lenders must provide complete payment deferment for at least 6 months (including payment of principal, interest, and fees) and not more than 1 year.
- Loan Forgiveness: An organization that receives a PPP loan is eligible for forgiveness of such indebtedness in an amount equal to the sum of the following costs incurred and payments made during the 8 week “covered period” beginning on the date of the origination of the loan: (a) payroll costs, (b) payment of interest on mortgage obligations incurred before February 15, 2020; (c) rent obligated under a leasing agreement in force before February 15, 2020; and (d) utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. Recent SBA guidance requires that at least 75% of the forgiven loan amount must be used for payroll costs.
As the goal of the PPP is to incentivize employee retention, the amount of loan forgiveness will be reduced if the number of employees employed by the loan recipient during the 8-week covered period is reduced as compared, at the election of the recipient, to either (a) employees per month employed by the recipient during the period beginning on February 15, 2019 and ending on June 30, 2019, or (b) the average number of full-time equivalent employees per month employed by the recipient during the period beginning on January 1, 2020 and ending on February 29, 2020. The amount of loan forgiveness shall also be reduced by the amount of any reduction in total wages of any employee during the 8-week covered period that is in excess of 25 percent of the total wages of the employee during the most recent full quarter during which the employee was employed before the covered period. If a reduction in the number of full-time equivalent employees or a reduction in employee wages is eliminated no later than June 30, 2020, the loan forgiveness amount may be determined without regard to such temporary reductions.
In order to receive loan forgiveness, a PPP loan recipient must submit certain verification documentation to the lender. The lender then has 60 days to issue a decision on the forgiveness application.
- Loan Maturity: Under the Act, any balance remaining on a PPP loan after application of forgiveness shall have a maximum maturity of 10 years; the Treasury Secretary has recently issued guidelines capping the maturity at two years.
For more information about PPP loans, or to submit an application, you can visit the SBA website here.
- Economic Injury Disaster Loans (EIDL) from States: The SBA is offering Economic Injury Disaster Loan (EIDL) assistance to states to make loans available to private, nonprofit organizations to help alleviate economic injury caused by COVID-19. Such loans may be used to pay fixed debts, payroll, accounts payable and other bills that could have been paid had the outbreak not occurred. The maximum loan amount is $2 million, and the interest rate for nonprofits is 2.75%. Repayment terms are up to a maximum of 30 years based upon each borrower’s ability to repay. Under the CARES Act, rules requiring a personal guarantee on certain EIDL loans are waived, as is the requirement that an applicant be unable to obtain credit elsewhere. The SBA may approve an applicant based solely on the applicant’s credit score, or it may use alternative appropriate methods to determine the applicant’s ability to repay.
The Act also provides that, during the period beginning January 31, 2020 and ending on December 31, 2020, a private nonprofit organization that applies for an EIDL loan in response to COVID–19 may request that the SBA provide a loan advance of up to $10,000 within 3 days of receipt of the loan application. The advance may be used for purposes including (a) providing paid sick leave to employees unable to work due to the direct effect of COVID–19; (b) maintaining payroll to retain employees during business disruptions or substantial slowdowns; (c) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (d) making rent or mortgage payments; and (e) repaying obligations that cannot be met due to revenue losses. An applicant is not required to repay any amounts of an advance even if subsequently denied a loan.
To apply for an EIDL loan and request a loan advance, visit the SBA website here.
- Reimbursement of Nonprofit Unemployment Payments: Act Section 2103 Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations provides that federal unemployment funds will be transferred to States as reimbursement for certain unemployment benefits paid by the State for weeks of unemployment during the period beginning March 13, 2020 and ending December 31, 2020. Nonprofits that have elected to reimburse the State for unemployment claims rather than pay payroll taxes to fund the State unemployment insurance program (as allowed under Code Section 3309(a)(2)) may be reimbursed for one half of amounts paid into the State unemployment fund.
- Employee Retention Tax Credit. Under the Act, an exempt organization described in Code Section 501(c) is allowed a credit against federal employment taxes if it (a) was operating during 2020, and (b) fully or partially suspended operations during any calendar quarter as a result of a governmental order limiting activity due to COVID-19. Act Section 2301 provides that, for each calendar quarter, such an exempt organization shall be allowed a credit against applicable employment taxes in an amount equal to 50 percent of the qualified wages with respect to each employee of such employer for such calendar quarter. This provision applies only to wages paid after March 12, 2020 and before January 1, 2021.
For an organization whose average number of full-time employees during 2019 was greater than 100, qualified wages include only those wages for which an employee is not providing services due to the suspension of operations; in other words, wages paid to an employee who is performing their duties despite the shutdown are not qualified wages. In the case of an organization with average employees of 100 or less, qualified wages include all wages paid by the employer during the suspension of operations, even if the employee is working for such wages. The amount of qualified wages with respect to any employee which may be taken into account under this provision for all calendar quarters may not exceed $10,000, and the credit allowed with respect to any calendar quarter may not exceed the applicable employment taxes on the wages paid with respect to the employment of all the employees for such calendar quarter.
We will continue to monitor developments related to the CARES Act and other initiatives to offer tax-exempt organizations relief from the challenges posed by the economic and public health fallout from the coronavirus.
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For more information concerning the matters discussed in this publication, please contact the authors Pamela A. Mann (212-238-8758, firstname.lastname@example.org), Ahsaki E. Benion (212-238-8890, email@example.com), Jeremy S. Steckel (212-238-8786, firstname.lastname@example.org), or your regular Carter Ledyard attorney.
Carter Ledyard has created a COVID-19 Response Group to monitor the evolving legal landscape, address client questions and ensure client compliance with the laws and regulations issued in response to the COVID-19 pandemic. The Carter Ledyard COVID-19 Response Group consists of Jeffery S. Boxer (212-238-8626, email@example.com), Judith A. Lockhart (212-238-8603, firstname.lastname@example.org), Bryan J. Hall (212-238-8894, email@example.com), Alexander G. Malyshev (212-238-8618, firstname.lastname@example.org), Melissa J. Erwin (212-238-8622, email@example.com), and Leonardo Trivigno (212-238-8724, firstname.lastname@example.org). Clients should contact the attorneys listed above or their regular CLM attorney for any questions concerning legal obligations arising from the COVID-19 pandemic.