The CARES Act and Tax-Exempt Organizations

By Nicholas Porto April 1, 2020

Late last week, the CARES Act was signed into law, a massive piece of legislation aimed at providing financial relief to businesses and individuals affected by the COVID-19 pandemic. In a bit of welcome news for many tax-exempt organizations, there are several provisions in the Act that are available to such organizations. Baker Newman Noyes is releasing several articles aimed at providing guidance and offering insight on how these provisions can be utilized by our clients. The aim of this article is to provide a very brief summary of what may be of interest to tax-exempt organizations and also providing links to more in-depth analysis provided throughout our website.

Small business administration loans:

Normally, most nonprofit organizations are specifically excluded from eligibility for an SBA loan. Only in rare times, usually in an effort to provide disaster relief, are these loans made available to nonprofits.

There are two types of SBA loans available to nonprofit organizations: Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP). Both the EIDL and the PPP are available to organizations with 500 or fewer employees. PPP is available to 501(c)(3) and 501(c)(19) organizations; whereas EIDL appears to be available to all nonprofit organizations. The loan amounts, terms and permitted use of the funds differ greatly between the two programs. Additionally, PPP loans generally can be forgiven and treated as a grant if certain provisions are met (such as maintaining payroll between February 15 and June 30), whereas EIDL cannot. PPP loans that are forgiven do not constitute income from an unrelated trade or business so tax-exempt organizations who qualify under the PPP would not be subject to tax on any amount forgiven. It is important to note that the 500 employee count is per person and is not calculated on an FTE basis.

Nonprofits that do not qualify for either loan program due to having more than 500 employees may also apply for resources under the Industry Stabilization Fund if they have 10,000 or fewer employees. This Fund offers a loan and loan guarantee program to organizations that may not otherwise qualify for relief under another program. Unfortunately, the loans are not eligible to be forgiven. The interest rate on these loans is 2% and organizations that use an Industry Stabilization Fund loan must maintain at least 90% of their workforce.

Organizations may apply for a loan under both the EIDL and the PPP; but if the organization has a loan forgiven pursuant to the PPP, doing so will preclude the organization from taking advantage of the payroll tax relief described below.

Tax credits and deferrals for employers

The CARES Act offers two incentive programs for tax-exempt employers to either offset or defer Social Security payroll taxes on their employees. Both were initiated to reduce the burden on cash flow for organizations that continue to maintain payroll through the pandemic crisis.

The first, the employee retention credit, allows for a credit to reduce payroll tax expense by 50% of an employee’s wages up to a maximum of $10,000 in wages (maximum of $5,000 per employee.) In order to qualify for the credit, a business would have had to have been in existence at the start of 2020 and seen a reduction in first quarter revenue of at least 50 percent as compared to the first quarter of 2019. The eligibility for the credit would continue through 2020 for each quarter until the organization’s revenue exceeds 80% of the revenue from that same quarter in 2019.

Tax-exempt organizations may also defer payment of social security payroll taxes otherwise due during 2020 that were incurred between March 27, 2020 and December 31, 2020. Half of the deferred payroll taxes would need to be paid by December 31, 2021 with the other half due December 31, 2022.

As mentioned above, the payroll tax credit and deferral are not available to employers who receive a forgivable PPP loan.

Charitable giving incentives:

To incentivize charitable giving, the CARES Act allows individuals who do not itemize to treat up to $300 of their donations to qualified public charities as an above-the-line deduction on their 2020 tax returns. This will allow individuals who normally would not receive any benefit from their charitable donations to receive a dollar-for-dollar reduction of their taxable income up to $300.

For individuals who do itemize their deductions, the CARES Act eliminates the adjusted gross income (AGI) threshold limits on charitable deductions. This will allow itemizers to deduct their charitable donations up to 100% of their AGI for donations made during 2020. To the extent that donors’ charitable gifts exceed their AGI in 2020, the excess is available to be carried forward to future tax periods.

Additionally, corporate donors who are traditionally limited to being able to deduct charitable gifts only up to 10% of taxable income are now allowed to deduct up to 25% of their taxable income for cash donations made in 2020. Donations of food inventory are also deductible up to 25% of a business’s taxable income.

The COVID-19 pandemic has impacted just about every life and business in the United States, and tax-exempt organizations have been no exception and arguably have been some of the hardest hit. As Congress and the IRS continue to release new information and guidance we will continue to provide you with updates.

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Looking for more?

CHECK OUT OUR COMPREHENSIVE GUIDE TO THE TAX PROVISIONS OF THE CARES ACT.