Just like for-profit employers, nonprofit organizations (“nonprofits”) across the country have been impacted by the COVID-19 crisis. Much action has been taken by Congress to enact laws that will provide for the economic health of business and employees. One law, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), includes nonprofits as beneficiaries of the relief. Nonprofit organizations are asking “Should I care about CARES?”

What Does the CARES Act Do?

The CARES Act was enacted to provide immediate assistance to sole proprietors, independent contractors, businesses, and nonprofits affected by the COVID-19 emergency. Among the provisions contained in the CARES Act is an authorization for the Small Business Administration (“SBA”) to guarantee loans made under a new loan program titled the “Paycheck Protection Program” (“PPP”). The full principal amount of PPP loans may qualify for loan forgiveness. The CARES Act also makes it easier for eligible entities, including nonprofits, to receive loans under the Economic Injury Disaster Loan (“EIDL”) program and infuses funds for loans to eligible business and mid-sized businesses.

Is a “Nonprofit” Eligible for These Loans?

Yes, nonprofits are eligible, but each loan payment program in the CARES Act has its own definition of which “nonprofit” is eligible, if at all. In addition to other eligibility requirements applicable to businesses, the following eligibility restrictions apply for nonprofits:

  • PPP defines “nonprofit organization” as “an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 (“Code”) and that is exempt from taxation under section 501(a) of the Code”. PPP also applies to veterans organizations described in described in section 501(c)(19) of the Code that is exempt from taxation under section 501(a) of the Code.
  • EIDL states that “private nonprofit organizations” are eligible, but no further definition is provided.
  • CARES Act Section 4003(b)(4) infuses funds into the lending system to make loans to eligible businesses, but is unclear whether nonprofits with fewer than 500 employees might be eligible.
  • CARES Act Section 4003(c)(3)(D) provides financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees, known as “Mid-Sized Businesses”, but again “nonprofit organization” is not defined.

In sum, nonprofits with 501(c)(3) and 501(c)(19) status are clearly eligible for PPP loans. However, it is less clear what opportunities are available for non-501(c)(3) nonprofits. Until the SBA provides additional guidance on this point, such nonprofits might consider asking their lender whether it will accept an application from them for the CARES Act program.

How Are “Employees” Counted?

PPP loans are available to nonprofits with 500 or fewer employees. To determine their eligibility, employers should use their average employee count over a 12 month period. Employers may choose either to count employees over the previous twelve months or from calendar year 2019. The SBA’s FAQs clarify that employers must exclude independent contractors when counting their employees.

How Do the SBA’s Affiliation Standards Affect the Way Nonprofits Count their Employees?

The SBA has developed affiliation standards that determine when two or more entities are considered an affiliate for size purposes. Generally, aggregation of related entities is required when the two entities share a 50% or more common ownership, where one of the entities has de facto control over the other entity (for example, with voting rights or veto power with a member-managed nonprofit or in certain national/chapter relationships), where the entities share control arising under contract rights (stock options, convertible securities, and agreements to merge), or affiliation is based on identity of interest (identical or substantially identical business or economic interests among close relatives). When two entities are considered “affiliates,” their employees are to be counted together when determining eligibility for SBA programs.

The CARES Act states that nonprofits are subject to the SBA’s affiliation rules as a general matter, but has provided separate guidance on how these rules apply to faith-based nonprofits. In light of the SBA’s analysis of the First Amendment and the Religious Freedom Restoration Act, the SBA has determined that its affiliation standards do not apply to the relationships between faith-based organizations when those organizations are connected for religious reasons (for example, the relationship between an individual church and its diocese or denomination).

The SBA will defer to a faith-based organization’s good faith interpretation as to whether it is exempt from the affiliation rules. The SBA likewise does not require participating lenders to assess the reasonableness of a faith-based organization’s decision that it qualifies for this exemption.

How Should Nonprofits Maximize PPP Eligibility?

An employer is eligible for a PPP loan that covers up to 2.5 its average monthly payroll costs. Because the CARES Act defines “payroll costs” broadly, a nonprofit might fail to include all eligible expenses in its calculation without care or outside guidance. In particular, subject to the exclusions in the CARES Act, qualified “payroll costs”, under the SBA Interim Final Rule for the PPP loan program, include compensation to employees (whose principal place of residence is in the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and, for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

Subsequent guidance from the SBA has clarified that “payroll costs” does not include any payments to independent contractors or sole proprietors. However, a nonprofit’s independent contractors or sole proprietors may be eligible to apply for their own PPP loans.

How Does CARES Act Help Nonprofits with Unemployment Insurance?

Most nonprofits do not pay into state unemployment compensation programs, in part to keep overhead costs down. In lieu of “pre-paying” that cost, most nonprofits reimburse the state when an unemployment claim is made by a former employee. The CARES Act helps nonprofits by allowing them to be reimbursed for half of the costs incurred by them through the end of 2020 to pay unemployment benefits.

What Should a Nonprofit Consider if it’s Not Eligible for PPP?

While PPP is a more favorable program due to the potential for forgiveness, some nonprofits may be ineligible for PPP due to their exemption status, size, or aggregation with affiliates. As a result, these nonprofits should strongly consider exercising the FICA tax credit and the employer FICA tax deferral, since both of these are unavailable in one form or another if an entity receives a PPP loan or forgiveness. The FICA tax credit is claimed on the quarterly tax return and helps the nonprofit avoid paying FICA taxes which would otherwise be due for employees experiencing COVID-19 hardships. here are employer size restrictions and limits on total compensation under the FICA tax credit. Similarly, nonprofits should also consider FICA tax deferral. This deferral is a way to effectively loan money to pay employer FICA taxes for two years by delaying 50% of the payment for 2020 to 2021, and the remaining 50% to the end of 2022.

Additionally, the EIDL program provides an avenue for nonprofits to obtain low interest, non-forgivable loans to meet cash flow needs. Applications for EIDL loans are made directly to the Small Business Administration and an advance of not more than $10,000 can be requested to be paid within three days of the application submittal. The applicant is not required to repay the advance if the loan is not subsequently approved. Advances can be used to (A) provide paid sick leave to employees unable to work due to the direct effect of the COVID–19; (B) maintain payroll to retain employees during business disruptions or substantial slowdowns; (C) meet increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (D) make rent or mortgage payments; and (E) repay obligations that cannot be met due to revenue losses.

How Can Nonprofits Encourage Donor Giving Right Now?

The CARES Act provides an expansive incentive for most Americans to donate “some” and a small percentage of Americans to donate “all.” First, the CARES Act includes a $300 above the line deduction for donors who do not itemize their deductions (i.e. they take the standard deduction) and make cash gifts to nonprofits in 2020 and beyond. The statute provides that the deduction is per “individual”, implying that married couples can each claim a $300 deduction even if they file jointly.

The CARES Act also provides an incentive for some of America’s wealthiest citizens who do not use the standard deduction, and instead itemize expenses. These taxpayers are now able to contribute cash gifts and deduct the amount of such gifts up to 100% of their adjusted gross income; normally, they would be restricted to only being able to deduct up to 60% of their income. In a similar vein, the 2020 corporate contribution limit increased from 10% to 25% of corporate income.

The only caveat to these new rules is that they are not applicable for gifts to private foundations, supporting organizations, or Donor-Advised Funds.

Nonprofits should also be cautious to include disclaimer language when seeking donations such as:

The Coronavirus Aid, Relief, and Economic Security Act provides an incentive for you to donate to NONPROFIT now and help us continue our mission during these difficult times. You should always consult your tax advisor, and NONPROFIT is not a law firm or accountant, but NONPROFIT has been informed the CARES Act permits each individual who takes the standard deduction to take a $300 deduction before your income is calculated (above the line) when you donate $300 of cash (ie. not property) to tax exempt organizations like NONPROFIT. And, the CARES Act gives individuals who itemize expenses the opportunity to donate 100% of their income in cash (ie. not property) and receive a 100% tax deduction (this is normally limited to 60%). As always, NONPROFIT maintains discretion and sole control over the use of any donated funds, but strives to honor donor’s requests for uses; restrictive gifts are prohibited. All donations are non-refundable.

For more information please contact Laura Lo Bianco at llobianco@lrrc.com, Eric Kniffin at ekniffin@lrrc.com and Bobbie Collins at bcollins@lrrc.com or visit www.lrrc.com.

     

     

This material has been prepared by Lewis Roca Rothgerber Christie LLP for informational purposes only and is not legal advice. Specific issues dealing with COVID-19 are fluid and this alert is intended to provide information as it is currently available. Readers should not act upon any information without seeking professional legal advice. Any communication you may have with a Lewis Roca Rothgerber Christie LLP attorney, through this announcement or otherwise, should not be understood by you to be attorney-client communication unless and until you and the firm agree to enter into an attorney-client relationship.