CARES ACT: Financial Relief for Nonprofit Organizations
April 13, 2020
As employers continue to navigate the uncertainty of COVID-19’s financial impact on their organizations, many eligible business owners are taking advantage of emergency loan opportunities made available by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We previously published summary guidance on the Paycheck Protection Program and Disaster Relief Loans which can be found here. Specifically, this article highlights: (i) the loan opportunities available under the CARES Act for nonprofit organizations, (ii) specific guidance on the Small Business Administration’s (the “SBA”) affiliation rules recently made available to faith-based organizations, and (iii) new charitable giving incentives for donors of qualified 501(c)(3) nonprofit organizations.
1.The loans available for nonprofit organizations in the CARES Act include:
Paycheck Protection Program (the “PPP”): The PPP is an emergency loan program for organizations to secure funds to pay employees and operating costs for a period of two months.
- Eligibility: The PPP is available to 501(c)(3) nonprofit organizations and 501(c)(19) veterans organizations with 500 or fewer employees that have been in operation as of February 15, 2020 and have paid employees. It is important to note in terms of eligibility that employees of affiliated, as determined under the SBA’s affiliation rules, nonprofit organizations, may be considered toward the 500-employee cap.
- Permissible Use of Loans: The PPP loans will be available from SBA approved local financial institutions, and no collateral or personal guarantees are required. Eligible nonprofit organizations must certify: (i) the funds are needed based on current economic conditions and (ii) will be used to retain staff and maintain payroll costs as well as for mortgage, lease and/or utility payments.
- Loan Forgiveness: Nonprofit organizations may be eligible for loan forgiveness up to two months of payroll, lease, mortgage interest, and utility costs. Forgiveness may be reduced if nonprofit organizations do not maintain employment or rehire employees by June 30, 2020. Organizations must apply for forgiveness through their lenders, and any remaining balance following the forgiveness will have a maximum maturity date of two years.
Expanded EIDL & Emergency Grants: While the CARES Act currently limits the PPP to 501(c)(3) nonprofit organizations and 501(c)(19) veterans organizations, other types of nonprofit organizations may be able to secure other financial relief through expanded Economic Injury Disaster Loan (“EIDL”) legislation. Loans of up to $2 million dollars are available as well as EIDL advances of $10,000 paid within three days.
- Eligibility: Eligible nonprofit organizations include most private foundations, charitable nonprofits (including faith-based organizations), 501(c)(4) social welfare organizations and 501(c)(6) trade and professional associations. Additionally, 501(c)(3) and 501(c)(19) organizations may apply for an EIDL grant in addition to a loan under the PPP so long as the loans are not used for the same purpose.
- Permissible Use of Loans: The EIDL funds will be available from the SBA, and CARES Act waived the personal guarantee requirement up to $200,000 as well as the requirement of inability of the organization to otherwise obtain credit. Eligible organizations may use the funds for paid sick leave, maintaining payroll, and for other increased costs due to the current economic disruption.
- Loan Forgiveness: The $10,000 advances are eligible for loan forgiveness, effectively treating the advances as a grant. The forgiveness on the advance applies regardless of whether a nonprofit organization is otherwise approved for an EIDL.
Mid-Size Loan Program: This loan program was created by the Treasury Department to fill the gap between the PPP and other industry financial relief available for big businesses. This program is available for nonprofit organizations with between 500 and 10,000 employees. While the dollar amount has not yet been specified, the interest on the loans will be capped at 2% with no principal or interest payments due for the first six months. This program remains somewhat undefined at this time, and further guidance is expected in the coming weeks.
2. New Guidance on Affiliation Rules for Faith-Based Organizations:
As mentioned above, when determining eligibility for the purposes of applying for a PPP loan, an organization’s affiliations with other entities will be considered for the 500-employee cap. Under the SBA affiliation rules, factors such as common ownership, management, and/or identity of interest are considered in the determination of whether an affiliation exists. Affiliated entities must add up all employees amongst the entire affiliation in determining whether they have 500 or fewer employees. The SBA recently published guidance, available here, that may alleviate affiliation concerns amongst certain faith-based organizations.
For faith-based organizations, the SBA has provided an exemption to the affiliation rules for situations where a connection between entities is based on a religious teaching/belief or is otherwise part of the exercise of a certain religion. The exemption is meant to capture those organizations that are connected by certain religious beliefs about church authority or internal constitution, or because the legal, financial, or other structural relationship between organizations reflects an expression of such beliefs. An example could include an organization’s relationship with a local diocese. On the other hand, the exemption is not meant to capture non-religious connections, such as administrative convenience, and organizations connected in that way will be subject to the affiliation rules.
3. Charitable Giving Incentives for Donors to 501(c)(3) Nonprofit Organizations:
In addition to the direct financial relief available to eligible nonprofit organizations, the CARES Act also provides charitable giving incentives for donors of qualified 501(c)(3) organizations.
For those individuals that itemize: The CARES Act lifted the prior 60% cap on annual contributions. Individuals may now deduct 100% of their adjusted gross income for cash gifts contributed to qualified 501(c)(3) organizations. For contributions to private foundations, the prior deduction rules remain.
For those individuals that do not itemize: The CARES Act introduced a new above-the-line deduction applying to cash contributions to qualified 501(c)(3) organizations of up to $300. The deduction will apply to those contributions made in 2020 and will be claimed on tax forms next year.
For corporations: The CARES Act lifted the prior 10% cap on deductions for cash contributions. Corporations may now deduct up to 25% of the corporation’s taxable income for cash contributions to qualified 501(c)(3) organizations. For contributions to private foundations, the prior deduction rules remain.
With guidance on the CARES Act and its applicable loan programs being released frequently and more expected in the coming days please feel free to reach out to any professional in the McNees Corporate & Tax Group for further clarifications and any questions you may have.
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