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April 2, 2020

CARES Act Summary for Nonprofits

Posted by COVID-19 Rapid Response Team

President Trump recently signed a $2 trillion legislative package to combat the coronavirus pandemic, bringing much needed economic relief to employers and employees impacted by the COVID-19 virus.

The House of Representatives overwhelmingly approved the legislation, which was passed by a unanimous vote by the Senate. This third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act CARES Act, H.R. 748, is the law. 

Here are some of the key highlights that relate to most nonprofits:

Charitable Giving

  • Corporate deductions: The CARES Act increases the limitation on corporate charitable contributions to 25% of the corporation’s taxable income (previously 10% of taxable income).
  • Individual contribution AGI limit increase: The CARES Act increases the deduction percentage limitation for cash charitable contributions from 60% to 100% of a taxpayer’s adjusted gross income for the 2020 tax year. Contributions to 509(a)(3) organizations and donor-advised funds are not eligible. Only cash contributions made in the 2020 calendar year to an organization described in Code Sec. 170(b)(1)(A) are eligible, which excludes most private foundations.  Any unused excess contributions will be allowed as a 5-year carryover.
  • $300 above-the-line charitable deduction: Individuals who use the standard deduction instead of itemized deductions may now claim up to a $300 charitable contribution deduction to arrive at adjusted gross income on their 2020 tax return.

Employment Taxes

  • Employee retention credit for employers: The CARES Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is not available to employers receiving Small Business Interruption Loans.
  • Delay of payment of employer payroll taxes: The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Half of the deferred amount is payable on December 31, 2021, and half on December 31, 2022. The deferral may not be available to employers who received Paycheck Protection Program loan forgiveness.

Small Business Interruption Loans

These were implemented to provide significant relief for small businesses substantially affected by COVID-19 with potentially forgivable loans (“Section 7(a) loans” or “Paycheck Protection Program loans”).

Eligible Nonprofit Entities

  • Generally, organizations with 500 or fewer employees (unless the industry’s SBA size standard allows more than 500 employees)
  • 501(c)(3) organizations, veterans’ organizations, and Tribal business concerns described in section 31(b)(2)(C).
  • The affiliation rules may apply

Requirements

  • Business must have been operational on February 15, 2020
  • Business paid employees’ salaries and payroll taxes or paid independent contractors
  • Business was significantly impacted by COVID-19
  • Borrowers certify to the lender, in good faith, to use funds to retain workers, maintain payroll and other obligations including mortgage payments, rent under a lease agreement, and utilities.

Loan Terms

  • Maximum loan is the lesser of the following options:
    1. $10 million, OR
    2. The average monthly payroll for the prior 12 months (prior to the loan date, up to $100K salary prorated annually per employee), times 2.5, OR
    3. The outstanding amount of certain SBA loans made on or after January 31, 2020
  • Maximum maturity is 10 years
  • Interest rate will not exceed 4%
  • Any canceled indebtedness will not be included in unrelated business taxable income
  • Borrower supplies lender with the following:
    • Application with number of full-time equivalent employees on payroll and other allowable costs
    • Payroll tax filings
    • State income, payroll, and unemployment insurance filings
    • Financial statements verifying payment on debt incurred before February 15, 2020
    • Other documents that may be requested

Allowable Use of Funds

  • Employee salaries (up to $100,000 in annual salary), payroll support, paid sick or medical leave, group healthcare benefits
  • Mortgage payments on debt obligation existing prior to February 15, 2020 or, rent under a lease agreement existing prior to February 15, 2020
  • Utilities
  • Insurance premiums
  • Other debt obligations incurred before February 15, 2020

Loan Forgiveness

  • Maximum forgivable amount is equal to the amount spent in the eight-week period after the loan origination date on the following items:  payroll costs (not including employees earning more than $100k salary prorated annually), interest payment on mortgages held prior to February 15, 2020, rent payments (if lease in force prior to February 15, 2020), utility payments (if service began prior to February 15, 2020)
  • Amount forgiven will be reduced (1) proportionately to any reduction in number of employees retained compared to number of employees existing in one of two testing periods, and (2) if there is any reduction in employee wages greater than 25% during the most recent full quarter for employees earning less than $100k annually
  • Borrowers that rehire employees previously laid off will not be penalized for reduced payroll
  • Amount not forgiven can be repaid over 10 years at a rate not to exceed 4%

Other Items

  • Collateral and personal guarantees will be waived during the covered period
  • Borrower and lender fees for 7(a) loans will be waived

We’re Here to Help

We’re closely monitoring the hour-by-hour changes, and we will send out updates as they become available. Reach out to our experts below if you need further information on this topic.

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