How the CARES Act Applies to Nonprofits

April 3, 2020 | Article

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes numerous provisions intended to provide economic relief to organizations impacted by COVID-19, including many if not all nonprofits.

COVID-19’s impact is far reaching. We’ve developed resources to help you make sense of it.

Common Questions on the CARES Act and Nonprofits
Below are frequently asked questions we’ve received in relation to COVID-19 and the CARES Act.

Do the provisions included in the CARES Act apply to nonprofit organizations?
Yes, for the most part. The CARES Act is a broad economic stimulus and tax bill that is intended to provide relief and assistance to individual taxpayers and businesses alike. Many of the provisions that apply to businesses do not limit the aid and assistance to specific entities or industries but rather apply limitations based upon the number of employees.

However, some of the provisions to determine the applicability are based on an organization’s specific tax classification under 501(a) of the tax code. For example, the Paycheck Protection Program defines eligible businesses to include nonprofit organizations, but only those organized under Section 501(c)(3). Veteran Organizations exempt under 501(c)(19) are separately referenced outside the definition of “nonprofit organizations” and are also included as eligible organizations for this program. Guidance has been provided by the SBA in a specific frequently asked questions document to clarify that faith-based organizations are eligible to receive SBA loans under both the PPL and EIDL programs. Some of the other provisions include the term “nonprofit organizations” but that term has not been fully defined. In addition, there are many provisions within the CARES Act that apply specifically to healthcare and educational organizations including specific industry appropriations.

We recently broke down what’s included in the CARES Act.

Our organization is currently facing short term cash flow needs. I have heard there are SBA loans available to help organizations keep their employees. What are these and how do they work?
At this tumultuous time, many nonprofit organizations may be facing reduced contributions and revenues due to economic uncertainty and community mandates requiring residents to shelter-in-place. Many nonprofit organizations that have cash-flow needs to pay employees and continue operations may qualify for relief and assistance through one of the SBA loan programs available via the CARES Act.

The CARES Act made modifications to two key types of loans provided by the SBA, making them available to more organizations.

Unsure how the relief provisions work?

Paycheck Protection Program under 7(a)
The Paycheck Protection Program (PPP) under 7(a) provides federally backed loans to small businesses with fewer than 500 employees (subject to some modifications for affiliations) including 501(c)(3) and (c)(19) organizations. The PPP loans are available in amounts up to $10 million or 2.5 times the organization’s average monthly payroll from the prior year.

The PPP loans must be used to cover payroll expenses (not in excess of $100,000 per employee), mortgage or debt obligation interest payments, utilities and rent. The CARES Act defers payments of principal, interest and fees for at least six months on the loans and caps interest at 1%. In addition, organizations may apply to receive loan forgiveness for eight weeks of eligible costs, but the amount forgiven may be reduced if the organization reduces the number of employees compared to the prior year or if employee pay is reduced more than 25% as of the last calendar quarter. The application period for these loans runs from April 3, 2020, to June 30, 2020.

Economic Injury Disaster Loans
The CARES Act modified the existing Economic Injury Disaster Loans (EIDL) by expanding eligibility and waiving certain requirements. These loans are available to all nonprofit organization types regardless of the number of employees and provide working capital for organizations that cannot meet their ordinary and necessary financial obligations as a result of a disaster.

EIDL loans have an interest rate of 2.75% for nonprofits and include a $10,000 emergency advance payment that can be received within three days of the application. This $10,000 emergency advance payment may be forgiven even if a borrower is denied EIDL funding, thus effectively being treated as a grant. If an organization receives a loan under the PPP program, the $10,000 advance payment would be considered as part of the forgiveness of that loan. 501(c)(3) or 501(c)(19) organizations that receive a PPP loan may also receive an EIDL loan as long at the loan is not used for the same purpose.

We’ve broken down the components of the SBA loans.

How is the number of employees determined under the Paycheck Protection Program
The number of employees is determined based upon the average number of people that are employed for each pay period over the last 12 calendar months. Any person that is included on the payroll whether full time, part time or temporary must be included as one employee.

In determining employees, an organization must include the employees of all affiliates in the calculation. Generally, affiliation exists where one business controls or has the power to control both businesses. Control can arise through ownership, management or other relationships. For nonprofit entities without stock, this control may occur if one or more officers or directors controls the board and/or management of another business. Further guidance on affiliation rules is expected to be released by the SBA.

Are nonprofit organizations with leased employees eligible under the Paycheck Protection Program?
Yes, nonprofit organizations that obtain employees from temporary employee agencies, professional employee organizations or that otherwise lease employees from outside of their organization are eligible for SBA loans and should include these individuals in their calculation of the number of employees to qualify. Note that volunteers or individuals who receive no compensation for work performed are not considered employees.

My nonprofit has more than 500 employees, are there other loans available for larger organizations?
In addition to the EIDL program, the CARES Act also provides relief to mid-size employers via the Industry Stabilization Fund, which will provide loans to employers with 500 to 10,000 employees. These loans will be granted with fixed 2% interest rates and will provide a six-month relief period before payments are due. The loans are intended to be used by organizations to retain at least 90% of their workforce with full wages and benefit through September 20, 2020, and to restore 90% of workforces in place as of February 1, 2020. Guidance on the implementation of these loans is still being addressed and expected to be released soon.

I’ve heard there are other payroll tax provisions available, can my nonprofit utilize these as well?
Maybe. The CARES Act includes a provision (Payroll Tax Deferral) that provides for the delayed payment of employer payroll taxes, i.e. the 6.2% Social Security tax. Payments due from the date of the CARES Act’s enactment through December 31, 2020, may be paid in 50% installments at December 31, 2021, and December 31, 2022. This provision is not available if the organization has received a loan under the Paycheck Protection Program that is forgiven.

The CARES Act also created an Employee Retention Credit, a refundable payroll tax credit that is available to businesses, including nonprofit employers, that have closed or significantly reduced operations due to COVID-19. The refundable credit is equal to 50% of qualified wages. For eligible employers with more than 100 employees, those are wages paid to an employee even though the employee is unable to work due to a full or partial suspension of operations due to a governmental “stay at home” or other order.

For eligible employers with 100 or fewer employees, “qualified wages” include all wages paid whether the employer is open for business or subject to a shutdown order. An organization is eligible for the credit if (a) its operations were fully or partially suspended during the calendar quarter due to government restrictions limiting travel, commerce or group meeting due to COVID-19 or (b) remained open but gross receipts declined by more than 50% compared to the corresponding quarter in 2019. Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes by the amount of the credit. Employers receiving PPP loans are not eligible to receive the Employee Retention Credit.

Organizations should review all loan and credit alternatives to determine which will provide the best option to assist the organization with cash flow needs.

If I receive funding under one of the SBA loans, is this treated like other federal loans or grants such that the receipt will subject my nonprofit to federal Single Audit requirements?
At this time guidance has not been released that indicates the loans are not subject to the same requirements as other federal loans and grants received. Until guidance is provided, nonprofit organizations should plan and prepare for any loans or grants received to be subject to a potential single audit if total federal funds exceed $750,000 during the year. Single Audit submissions have been extended by six months from their original due dates by a memorandum released by the Office of Management and Budget.

It was recently announced that nonprofits who received PPP funding would not be subject to Uniform Guidance single audit requirements. Those who took EIDL loans, however, will be subject to single audit requirements.

COVID-19 has also impacted other financial reporting considerations.

Our nonprofit organization self-insures for unemployment insurance, is there relief available?
Yes. The CARES Act includes a provision for nonprofit organizations that reimburse the state dollar-for-dollar when former or furloughed employees file for unemployment benefits (reimbursable employers). The provision provides that reimbursable employers may be reimbursed for 50% of the costs associated with benefits provided to employees that are laid off or furloughed due to the COVID-19 pandemic between March 13 and December 31, 2020.

What other incentives are included in the bill that will impact the nonprofit industry?
The CARES Act includes charitable giving incentives targeted towards individual and corporate donors. The act allows a $300 above-the-line deduction for 2020 charitable contributions to 501(c)(3) organizations for individual taxpayers that do not itemize. These contributions must go directly to the charity, donations to donor advised funds (DAFs) or other intermediaries will not qualify.

For taxpayers who itemize, the AGI cap on annual contributions will be temporarily changed from 60% to 100% of AGI for 2020 and any excess contributions will be provided a five-year carryover period. For corporations, the annual contribution limit is changed from 10% to 25%. In addition, the corporate food donation cap has been raised from 15% to 25%.

Can nonprofit organizations utilize the updated net operating loss (NOL) rules in the CARES Act?
Yes. Organizations who file Form 990-T may benefit from updates to the NOL rules, which reverse the NOL rule changes implemented by the recent Tax Cuts and Jobs Act. Specifically, the new provision temporarily allows losses incurred during 2018, 2019 and 2020 to be carried back up to five years (versus only carried forward). In addition, losses carried over to 2019 and 2020 can offset 100% of taxable income versus 80% under the old rules.

Understanding the Options Available to your Nonprofit
Guidance is continually being updated regarding relief provisions in the wake of COVID-19. It’s important to stay up to date and understand what options are available to your nonprofit as you navigate this time of uncertainty.

Have a question about how these provisions will impact your nonprofit? >

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