Many issues facing the business environment related to COVID-19 are magnified for non-profits due to the reliance on government grants, public fundraising and other forms of support, which can be difficult to forecast in a typical year, much less during these uncertain times. Employers are concerned with meeting the needs of their teams, while the needs of their program recipients increasingly grow.
When speaking with our clients, we have noted some common questions and challenges, which we have summarized below.
Small Business Administration (SBA) Payroll Protection Program (PPP)
The SBA’s PPP provides potentially forgivable loans to small businesses with less than 500 employees in order to cover their payroll costs, rent, utilities and mortgage interest over eight weeks following the date of the loan. For the sake of the PPP, small businesses also include charitable nonprofits (501(c)(3) organizations), veteran organizations, sole proprietors, independent contractors and self-employed individuals.
Banks began receiving applications for PPP loans the morning of April 3, 2020, and are set to end on June 30, 2020. Due to the volume of applications expected to be received and the maximum funding amount of $349 billion, there is an increased sense of urgency in applying for the PPP loan as soon as possible.
The maximum amount of loans is the lesser of two and a half times average monthly payroll costs for the previous year and $10 million.
What are considered payroll costs?
Payroll costs are capped at $100,000 per employee on an annualized basis and include salaries and wages up to $100,000 per employee, paid vacation, parental, family, medical or sick leave, allowance for dismissal or separation, group health and retirement benefits, and state and local taxes assessed on employee compensation. However, this excludes payments for employees whose principle residence is outside of the U.S.
To which nonprofits does this apply?
Of particular importance to non-profits is that this program is not currently available to non-profit organizations other than 501(c) (3) and veteran organizations. Additionally, the SBA’s affiliation standards to aggregate the number of employees to calculate the total for the “less than 500 employees requirement” are still in effect for non-profits; they were loosened only for hotel and food industry businesses, franchises and those businesses that receive financial assistance from the SBA licensed small business investment companies (SBICs).
Potential Loan Forgiveness
Loans under the PPP will be forgiven if the proceeds are used for payroll costs, as well as eligible rent, mortgage interest, lease obligations and utilities, provided that the full-time employee headcount is not reduced or salaries for employees are not reduced by more than 25 percent for any individual employee. PPP loans not forgiven will be repaid over two years at a one percent interest rate following a sixmonth deferral period as of the date of the loan. Below are some resources related to the PPP:
Economic Injury Disaster Loan
Organizations that have been affected financially by COVID-19 may be eligible to receive an Economic Injury Disaster Loan through the SBA. Although there is no loan forgiveness available under this type of program, the loan permits a more liberal use of the funds than the PPP. The interest rate for nonprofits under this program is 2.75 percent, and the repayment term can go up to a maximum of 30 years. Loan applicants can apply for a loan advance of $10,000 which does not have to be repaid if the loan is denied. This program is not limited to only 501(c)(3) or 501(c)(19) organizations providing more non-profits access to funds. The application for the loan can be found here.
Payroll Tax Considerations
Delayed Payment of payroll taxes
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) permits employers to delay the payment of the employer portion of payroll taxes that would have been required to be deposited March 27, 2020, and Dec. 31, 2020. The employer will be required to deposit one-half of the deferred taxes by Dec. 31, 2021, and the remaining balance must be deposited by Dec. 31, 2022. The ability to defer payroll taxes is not available to any employer who receives loan forgiveness under the PPP.
Employee Retention Credit
Employers can get a refundable tax credit of up to 50 percent of qualifying wages, up to $5,000 per employee (i.e., $10,000 wage cap per employee). To be eligible for the credit, an employer must have partially or fully suspended operations due to orders from the government or experienced a greater than 50 percent reduction in receipts due to the COVID-19. The credit is applied to the employer portion of payroll taxes with any excess being refundable to the employer. If the organization receives a loan through the PPP, they are not eligible for the Employee Retention Credit. Additional information can be found at the Internal Revenue Service (IRS) Employee Retention Credit FAQ page.
Provisions to Encourage 2020 Charitable Giving
Some of the CARES Act provisions are designed to directly encourage support of public charities defined as those described in IRS code section 170 (b)(1)(A), which includes public charities and excludes supporting organizations, donor advised funds and private foundations.
Individuals who do not itemize deductions can directly reduce taxable income by making an above the line cash contribution of up to $300 to a qualified charity in 2020. Charitable contributions carried over from 2019 to 2020 do not qualify for the $300 above the line deduction. This contribution must be paid in cash.
The CARES Act temporarily modified percentage limitations for charitable donations available for individuals and corporations. Donations must be paid in cash in 2020 with excess carried over as 60 percent charitable contribution. They must be paid to a public charity (excludes supporting organizations, donor advisory funds and private foundations), and taxpayers elect treatment to be a 100 percent contribution with respect to each contribution. One may not wish to deduct below a certain taxable income level.
Under the provisions:
- Individuals may deduct up to 100 percent of adjusted gross income (AGI).
- Corporations may deduct up to 25 percent of taxable income.
- Partnerships/S Corporation contribution treatment is determined at the partner/shareholder level.
- Contribution of food inventory from any trade or business increased from 15 percent to 25 percent.
Grants for Higher Education
The CARES Act provides for a $30.8 billion Education Stabilization Fund, of which approximately $14 billion is reserved for higher education. The funding formula has not been finalized, but institutions with a higher share of Pell Grant recipients will receive a larger apportionment. Colleges and universities must use at least 50 percent of the funds for emergency financial aid grants to students for expenses related to the disruption of campus operations due to the coronavirus (including eligible expenses under a student’s cost of attendance, such as food, housing, course materials, technology, healthcare and child care). For more information, refer to section 18004 of the CARES Act.
Unrelated Business Income/Form 990-T
Under applicable business tax provisions in the CARES Act, there are now opportunities for exempt organizations with a net operating loss (NOL) in 2018, 2019 or 2020. NOL aggregation rules under the Tax Cuts and Jobs Act (TCJA) still apply, whereas NOLs are calculated per unrelated business taxable income (UBTI) activity and may not offset income arising from a separate UBTI activity. Under the TCJA, NOLs arising in 2018 and later tax years could only be carried forward and offset 80 percent of taxable income.
The CARES Act removes the NOL 80 percent limitation for tax years beginning before January 1, 2021. For NOLs arising in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021, these NOLs may be carried back five tax years. This carryback only applies to losses generated in 2018, 2019 and 2020. Also, a short period would count as a tax year for purposes of the carryback period.
Beginning with the 2021 tax year, the old rules are reinstated. Any remaining “pre-2018 NOL” can offset 100 percent of taxable income. Any remaining “post-2017 NOL” can only offset 80 percent of taxable income. NOL’s generated in 2018, 2019 and 2020 could be used to offset tax at a higher rate if carried back to a “Pre-TCJA” year. A taxpayer may elect to waive the carryback period for the NOLs. Taxpayers should be cautious with carryback and consider all impacts. Carrying back an NOL may change several other limitations and/or credits on a return.
Tax Filing Deadlines Related to Form 990 & Form 990-T
On March 21, the IRS announced that the federal income tax filing due date was automatically extended from April 15, 2020, to July 15, 2020. Subsequently, the IRS also extended federal gift and estate tax returns for the same time frame. However, the due date for information returns, including the Form 990, have not been extended for any time periods. For example, June 30, 2019, year-ends with a final extended Form 990 due date of May 15, 2020, are currently still due along with the initial due date for calendar 2019 filers. The same is true for Form 990-T filings due on May 15, 2020, however, the Form 990-T due on April 15, 2020, was extended to July 15, 2020. The federal Form 5500 is also an information return that still has the statutory due date, which is seven months after the end of the year-end, plus extension.
Federal Single Audit Submissions
Last week, the Office of Management and Budget (OMB) issued announcement M-20-17, calling for federal agencies to allow recipients and subrecipients an extension of time if they have not yet timely filed their single audits submission with the Federal Audit Clearinghouse. Effective March 19, 2020, which is the date of the issuance of this memorandum, organizations with fiscal year-ends through June 30, 2020, can delay the completion and submission of the single audit reporting package until six months beyond the normal due date. For example, a Sept. 30, 2019, year-end now has until Dec. 31, 2020, to submit its reporting package. This is technically only guidance by the OMB to the federal agencies, so recipients should check with their respective cognizant agency to verify that the agency has implemented the OMB guidance. Additional information can be found here.
Other Business Considerations
In addition to the CARES Act, non-profits should consider a review of the organization’s operations, including cash-onhand considerations and overall prudent business decisions. Consider opening a line of credit in the event a draw down may be needed. Keep your lender informed to avoid surprises, but also be prepared in the event that lending is tightened. Consider reviewing the organization’s budget and adjust as needed to make sure there is proper cash flow. Also, consider discussions with your wealth advisor and confirm that the current strategy is the right strategy for the organization during these times.
In closing, being attentive to the basics of cash management and exploring new forms of short-term liquidity will be key for non-profits to stay on mission and continue to serve their communities.
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