On March 27, 2020, President Trump signed into law the CARES Act to support businesses impacted by COVID-19. As part of the CARES Act, eligible small business concerns, including section 501(c)(3) not-for-profits (“NFPs”), can apply for enhanced Economic Injury Disaster Loans (“EIDLs”) and for forgivable loans under the Payroll Protection Program (“PPP”).
However, NFPs that do not qualify under section 501(c)(3) are not eligible for loans under the PPP, e.g., entities qualifying under section 501(c)(4). In addition, many NFPs that do not meet the eligibility criteria for these programs are left wondering what funding or other options are available to them. Their options include the following:
- Employee Retention Tax Credits
- Employer Payroll Tax Deferrals
- Paid Sick Leave/Paid Family Leave Credits
- Coronavirus Economic Stabilization Act of 2020 State, Local, and Private Funding Sources
Employee Retention Tax Credits
Under Section 2301 of the CARES Act, eligible employers can receive a credit against their employment taxes for wages paid from March 13, 2020 through December 31, 2020.
Eligibility
The employee retention tax credit (“ERTC”) is a refundable payroll tax credit that can be obtained as long as no loan is obtained under the PPP. NFPs (as defined in section 501(c)) generally are eligible to the extent their operations are fully or partially suspended due to a governmental order related to COVID-19. The IRS has addressed these tests in a series of FAQs. Suspension should be evaluated at a programmatic or grant level for organizations that have restrictive funding. There is a second test in the statute that looks to a significant decline in gross receipts, but the statute indicates this rule does not apply to NFPs, at least as interpreted by the Senate Finance Committee.
Calculation of Benefit
The refundable payroll credit is available for 50% of the qualified wages paid between March 3, 2020 and December 31, 2020, and includes qualified health plan expenses that are properly allocable to the wages. The credit is limited to $10,000 of qualified wages per employee, so the maximum credit for any employee is $5,000.
The ERTC applies to businesses of any size although the calculation of amount of the credit will differ depending on the number of employees. For employers with more than 100 employees, the ERTC is limited to wages of employees who are not working; for employers with 100 or fewer employees, it applies more broadly.
Limitations
There are several limitations on the total amount of the credit available to organizations. Qualified employee wages paid by an employer of more than 100 FTEs may not exceed the amount the employee would have been paid for working an equivalent duration during the previous 30-day period. In addition, organizations cannot claim employees for which credit will also be claimed for Work Opportunity Tax Credits, section 45S Credits, or the COVID-19 paid leave credits under the Families First Coronavirus Response Act.
How to Obtain the Benefit
As detailed in Internal Revenue Service Notice 2020-22, employers may reduce their employment tax and income tax deposits for anticipated credits. In addition, employers may file IRS Form 7200 if reduction of the employment tax deposits would be insufficient or for advance payment.
Employer Payroll Tax Deferrals
Under section 2302 of the CARES Act, employers have the option to defer 50% of the employer’s portion (6.2%) of the Social Security tax on wages paid from March 27, 2020 through December 31, 2020. Section 2302 is available to any business that does not obtain loan forgiveness under a PPP loan.
Eligibility
There is no need for the not-for-profit entity to demonstrate any negative impact by COVID-19. This provision applies to businesses of any size or number of employees.
Benefit
For purposes of section 2302, employment taxes are limited to 50% of the employer’s portion (6.2%) of Social Security taxes on wages, and no interest is imposed on the deferred amount. Deferred taxes must be repaid by the Employer in equal installments by December 31, 2021 and December 31, 2022.
The IRS recently released FAQs allowing employers to defer payroll taxes up to the date of loan forgiveness under a PPP loan, and then to continue the deferral of such amounts up to the repayment dates listed in the statute – half by December 31, 2021, and the balance by December 31, 2022. The only limit is that the deferral of additional payroll taxes must stop as of the date of forgiveness. This is a big victory for taxpayers, especially since forgiveness under a PPP loan may not occur as a practical matter until September or October of this year at the earliest.
Taxpayers are entitled to defer payroll taxes under the payroll tax deferral provision before they determine whether they are entitled to ERTCs or credits under the qualified sick/family leave provisions of the Families First Coronavirus Response Act. This is another favorable aspect of the IRS FAQs because it allows employers to layer the benefit of payroll tax deferral on top of these other provisions.
Not-for-Profit Considerations
NFPs should consider a formal Board action prior to deferral of employment tax obligations. Failure to remit required payroll taxes that were deferred could expose board members to joint and several personal liability for the payroll taxes. The organization should establish internal controls to verify these taxes are paid timely when they are required to be paid.
Paid Sick Leave / Paid Family Leave Credits
Separate from the CARES Act, the Families First Coronavirus Response Act was signed into law on March 18, 2020, and it requires employers, including tax-exempt organizations, with fewer than 500 employees to provide paid leave to an employee if they are unable to work or telework under several scenarios. These scenarios relate to the following:
- Employee is subject to a federal, state or local quarantine or isolation order.
- Employee is advised by a healthcare provider to self-quarantine.
- Employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
- Employee is caring for an individual subject to a quarantine or isolation order.
- Employee is caring for a child whose school or place of care is closed or unavailable.
Employer Requirements
Employer requirements vary based on which scenario an employee qualified for paid leave under. For scenarios #1-3, employers are required to provide employees up to 10 days (80 hours) of full wages up to a cap of $511 per day, plus certain qualified health care costs. For scenarios #4-5, employers are required to provide employees up to 10 days (80 hours) of two-thirds of wages capped at $200 per day, plus certain qualified health care costs. In addition, scenario #5 will result in required family leave payments after the first 10 days of leave. For family leave, employers are required to provide an additional 10 weeks of two-thirds of wages up to $200 per day. However, employees are required to have 30 days of employment prior to start for paid family leave. Lastly, employers are required to provide this notice to all of their employees to notify them of this benefit.
Employer Benefits
Employers will receive a refundable payroll tax credits for qualified paid sick/family leave wages. Employers receive the refundable credit as an offset to certain employment taxes and can be claimed on IRS Form 941, and an advance credit can be obtained on IRS Form 7200. Credits taken will reduce the amount of “payroll costs” under PPP loans.
Main Street Lending Program
Under section 4003 of the CARES Act, Congress appropriated $454 billion of funds to provide loans directly to eligible businesses, including NFPs, with between 500 and 10,000 employees. This program will be administered through the Treasury Department and Federal Reserve. Loans will not be forgivable like PPP loans. Loans will be subject to an annualized interest rate that is not higher than 2% per annum. For the first 6 months after any such loan is made no principal or interest shall be due or payable.
Eligible Borrowers
- No more than 10,000 employees or $2.5 billion in 2019 annual revenue
- Those organized in the US, have significant operations in the US, and a majority of its employees are based in the US
Terms
- 4 year, unsecured loans with no prepayment penalties
- Principal amount between $1 million and the lesser of (i) $25 million and (ii) an amount that, when added to the borrower’s existing debt and uncommitted but undrawn debt, does not exceed 4 times the borrower’s 2019 EBITDA
- Interest rate equal to the Secured Overnight Financing Rate (currently 0.01%) plus 2.5% to 4%
- Principal and interest payments deferred for 1 year, but interest accrues as of the date the loan is made
- Origination fee of 1% of the principal amount
The CARES Act lists specific good-faith certifications required for any potential eligible borrower looking to apply for these loans. These representations are expected to include the following and are subject to change based on final guidance issued by the Treasury Department. For NFPs these include certifying:
- The uncertainty of economic conditions on the date of the application makes necessary the loan request to support ongoing operations of the recipient.
- The funds it receives will be used to retain at least 90 percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020.
- The recipient intends to restore no less than 90% of the workforce of the recipient that existed as of February 1, 2020 and to restore all compensation and benefits to the workers of the recipient no later than 4 months after the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020.
- The recipient is not a debtor in a bankruptcy proceeding.
- The recipient will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan.
- The recipient will remain neutral in any union organizing effort for the term of the loan.
Required Attestations (in addition to required certifications)
- Loans will not be used to repay or refinance preexisting loans or lines of credit made to the borrow
- Borrower will not do any of the following:
- Use loan proceeds to repay other loans
- Repay debt of equal or lower priority, except for mandatory principal payments
- Cancel or reduce its outstanding lines of credit with any lender
- Borrow requires financing due to COVID-19 and it will use the loan proceeds to make reasonable efforts to maintain its payroll and to retain its employees during the loan term
- Borrower will maintain 4x leverage relative to EBITDA over the term of the loan
- Borrower will abide by the compensation, stock repurchase, and distribution provisions in section 4003 of the CARES Act
Compensation Considerations
For loan or loan guarantees made under section 4003(b), certain limitations are placed on employee compensation. These restrictions begin on the date on which the loan agreement is executed and extend 1 year beyond the date on which the loan or loan guarantee is no longer outstanding. Specifically, no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 will receive compensation in excess of the calendar year 2019 during any 12 consecutive months for worked performed. In addition, the amount of business severance pay or other benefits to these employees may not exceed twice the 2019 calendar year compensation.
State, Local and Private Funding Sources
The CARES Act provides opportunities for individual donors to NFPs through two key provisions: (i) $300 above-the-line charitable contribution for standard deduction filers and (ii) an increase in the AGI limitation for charitable contributions from 60% to 100%. More information about the criteria and tax considerations for these provision can be found on Withum’s website.
In addition to federal funding, state and local governments are providing lending programs and grants separate from those listed above. See additional information compiled by Withum for various state economic development grant listing.
Finally, private foundations throughout the United States have mobilized to continue to reach affected organizations. Certain organizations are stepping up in various ways to assist NFPs including issuing next year’s grants in advance, issuing new unrestricted support, and loosening restrictions on previously-funded support. NFPs are encouraged to reach out to current private foundation partners to see if any assistance can be provided.
Authors: James Trubenbach-Byrne, CPA | [email protected] and Dan Mayo, JD, LLM | [email protected]
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