Nonprofit Radio: Nonprofits and CARES Act

I was interviewed on a special edition of Tony Martignetti Nonprofit Radio released today, April 4, discussing specific provisions of the Families First Coronavirus Response Act and the CARES Act that apply to nonprofits. You can listen here. Below are some highlights of the two Acts and links to helpful resources.

Families First Coronavirus Response Act

The Families First Coronavirus Response Act (FFCRA) requires certain employers (generally including nonprofit employers with under 500 employees) to provide their employees with paid sick leave and expanded family and medical leave for specified reasons related to COVID-19. These provisions apply from April 1, 2020 through December 31, 2020.

An employee is entitled to take leave related to COVID-19 if the employee is unable to work, including unable to telework, because (1) the employee is subject to a quarantine order related to COVID-19; (2) has been advised by a health care provider to self-quarantine related to COVID-19; (3) is experiencing COVID-19 symptoms and is seeking a medical diagnosis; (4) is caring for an individual subject to an order described in (1) or self-quarantine as described in (2); (5) is caring for his or her child whose school or place of care is closed (or child care provider is unavailable) due to COVID-19 related reasons; or (6) is experiencing any other substantially-similar condition specified by the U.S. Department of Health and Human Services.

Generally, employers covered under the Act must provide employees:

  • up to two weeks of paid sick leave based on (A) their regular rate of pay for qualifying reasons #1-3 above (capped at $511 daily); or (B) 2/3rds of the regular rate of pay for qualifying reasons #4 and #6 above (capped at $200 daily); and
  • up to 12 weeks of paid sick leave and expanded family and medical leave paid at 2/3rds for qualifying reason #5 above (capped at $200 daily).

The paid leave requirements may be seen as an expensive burden for many covered nonprofit employers, but the FFCRA covers the costs of this paid leave by providing them with refundable tax credits. It’s possible to receive an advance on these tax credits by filing new Form 7200. Applicable tax credits also extend to amounts paid or incurred to maintain health insurance coverage. Nevertheless, small employers with fewer than 50 employees may qualify for exemption from the paid leave due to school closings or child care unavailability if the leave requirements would jeopardize the viability of the business as a going concern.

Each covered employer must post in a conspicuous place on its premises a notice of FFCRA requirements. Businesses (including nonprofits) that are closed or have furloughed employees because of lack of work are not required to provide paid leave under the FFCRA.

Coronavirus Aid, Relief, and Economic Security Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the biggest economic stimulus package in the country’s history at $2 trillion, including $300 billion in cash payments to individuals, $260 billion in extra unemployment benefits, and $350 billion in new loans to small businesses.

Paycheck Protection Program

The Paycheck Protection Program (PPP) is the forgivable loan program available for small businesses (including 501(c)(3) and 501(c)(19) nonprofits) with under 500 employees. The rationale for the PPP is to provide a direct incentive for small businesses to keep their workers on the payroll. Unlike a regular SBA loan, no collateral or personal guarantees are required and there are no lender fees.

The PPP loan has a maturity of 2 years and an interest rate of 1%. Loan payments will also be deferred for six months. However, the SBA will forgive the loan if all of the borrower’s employees are kept on the payroll for eight weeks and the money is used for payroll costs (including benefits for vacation, parental leave, medical leave, and sick leave, up to total payroll costs based on $100,000 of annual income per employee), rent, mortgage interest, and/or utilities, but payroll must account for 75 percent of the forgivable amount.

Generally, the maximum amount of loan an eligible recipient may qualify for is equivalent to 2.5 times the average total monthly payroll costs from the one year period prior to the date of the application (capped at $10 million).

We encourage qualifying nonprofits to apply for the PPP loan very early in the process (applications were to be available on Friday, April 3, but not all lenders were prepared due to lack of integration with the SBA) because funds may run out quickly. A form of the application is available here. Note that there have been many stories of nonprofits having difficulties finding lenders. But if an application has been accepted, funding may come within a couple weeks. Nonprofits may find it advantageous to go to their banks to see if they can process the PPP loan, but they can also find an eligible lender here.

Economic Injury Disaster Loan

The Economic Injury Disaster Loan (EIDL) is a targeted, low-interest loan available to small businesses and private nonprofit organizations (not limited to 501(c)(3) organizations) that have been severely impacted by the Coronavirus (COVID-19) outbreak. The loans may be used to pay fixed debts, payroll, accounts payable, or other bills that can’t be paid because of the COVID-19 outbreak. The interest rate is 3.75 percent for small businesses without credit available elsewhere (businesses with credit available elsewhere are not eligible to apply for assistance) and 2.75 percent for nonprofits. The first payment is due in 12 months. The EIDL application is available here.

For many nonprofits, the most important feature of the EIDL program is the $10,000 advance provided to applicants within 3 days of application (though it appears to be taking several days longer). The advance need not be repaid even if the applicant is subsequently denied a loan. However, it may be counted against any PPP loan forgiveness amount an employer might receive.

An qualifying employer may be eligible for a PPP loan and an EIDL, but not to cover the same costs. An EIDL may be refinanced into a PPP loan if it otherwise qualifies.

Charitable Contribution Deductions

A new above-the-line deduction for one year (2020) was created for cash contributions of up to $300 made to certain qualifying public charities. All taxpayers would be eligible to take the deduction unlike the standard charitable contribution deduction which provides a tax benefit only to the approximately 8% of taxpayers who itemize their deductions. The new deduction would not apply to noncash gifts or to gifts contributed to donor advised funds or supporting organizations.

For individual taxpayers who itemize their deductions, the limit on deductions for contributions to public charities, ordinarily 50% of adjusted gross income (AGI) or 60% for cash, is suspended for 2020 (subject to making an appropriate election). For corporations, the limit on deductions for such contributions, ordinarily 10% of AGI, is elevated to 20% for 2020.

See Giving More Than 60% Of Income To Charity? CARES Act Says Deduct It! (Forbes)

Employee Retention Payroll Tax Credit

The Employee Retention Payroll Tax Credit (ERC) is generally available to all private employers, including nonprofit employers, except for small businesses that take small business loans. However, to qualify, (1) the employer’s business must be fully or partially suspended by government order due to COVID-19 during the calendar quarter, or (2) the employer’s gross receipts must be below 50% of the comparable quarter in 2019 (once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter).

The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. For an employer that had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care.

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. For more details, the IRS has an FAQ page regarding the ERC available here.

Deferred Payment of Payroll Taxes

The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes (including the social security portion of FICA tax) through the end of 2020. The 2020 deferred amounts will be due on December 31, 2021 (for the first 50 percent of the liability), and December 31, 2022 (for the remaining 50 percent of the liability). See IRS Notice 2020-22.