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INSIGHT: CARES Act for Not-for-Profit Entities

April 30, 2020, 1:01 PM

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion economic relief bill signed into law on March 27, 2020, includes components intended to provide significant support and emergency relief to nonprofit organizations, their employees, and the freelancers they engage.

Several loan programs offered by the Small Business Administration (SBA) aim to allow smaller businesses and nonprofits to access emergency funding and retain workers. These include a new loan program, the Paycheck Protection Program, and two expanded existing programs, the Economic Injury Disaster Loans and the SBA Express Loans. The CARES Act (Public Law 116-136) made such loan programs newly available to many not-for-profit entities. Additional loan programs under the responsibility of the U.S. Treasury and the Federal Reserve Bank, including the Economic Stabilization Loans described below, provide support to organizations too large to qualify for the SBA loans.

In addition to providing financial support, the CARES Act created new tax benefits which give donors additional incentives to support nonprofits, and temporarily eased the tax burden on nonprofits and their employees through, for example, an employee retention tax credit, payroll tax deferral, and changes in the treatment of net operating losses for unrelated business taxable income. Additional support is provided to employees of nonprofits and freelancers via expanded leave and unemployment benefits, some of which are described below. Finally, the CARES Act provides specific emergency support to certain nonprofits operating in critical areas, such as the Public Health and Social Services Emergency Fund.

SMALL BUSINESS ADMINISTRATION LOAN PROGRAMS

SBA’s Paycheck Protection Program Loans

Overview
Loans under the SBA’s Paycheck Protection Program are administered by participating lenders. For a list of such lenders, click here. (As of the date of this article, some lenders have limited access to borrowers with whom the lender had a preexisting client relationship, such that “know your customer” policies had been satisfied.) There has been significant demand for such loans, since the CARES Act provides that the loans are forgivable under certain conditions. The CARES Act appropriated $349 billion for this program, an expansion of the SBA 7(a) loans program; loans made under the program during the applicable period are 100% guaranteed by the SBA. The original funds were depleted within a matter of weeks, and have been replenished with $310 billion under the Paycheck Protection Program and Health Care Enhancement Act (PPPHCE Act).

In order to retain workers, a borrower can obtain a loan equal to 2.5 times its average monthly payroll for the prior year (including benefits and related local taxes, with some caveats, and excluding independent contractors compensation), up to $10 million, until June 30, 2020.

Eligibility
Small organizations in the United States with up to 500 employees (which generally includes employees of affiliates), or larger organizations which meet size standards in their industry, may be eligible, and can apply for a loan to cover payroll, mortgage interest payments, rent and utilities, insurance premiums, and debt service expenses and certain loan repayments (including repayment of certain prior SBA loans). The application is here. Unlike other SBA loans, borrowers are not required to prove that they are unable to obtain loans from other lenders. However, as part of the application, borrowers must certify that the loans are needed to remedy economic hardship caused by the coronavirus outbreak.

Terms and Conditions
Terms of these loans are generally borrower friendly:

  • No pledge of collateral or guaranties required (the CARES Act waives the personal guaranty typically required for SBA loans);

  • Payments on the loans deferred by at least six months, and up to a year, without prepayment penalty;

  • No fees payable to the SBA;

  • 1.0% interest rate per annum;

  • Loans may be partially or entirely forgiven to the extent used to cover payroll, mortgage, rent or utilities payments over an eight-week period following the closing of the loan (with at least 75% of the loan proceeds to be used for permitted payroll costs), provided that the borrower does not (i) reduce headcount through June 30, 2020, or rehires employees by June 30, 2020, or (ii) reduce compensation by more than 25% for employees that earn up to $100,000 a year through June 30, 2020; and

  • A two-year term to repay amounts that are not forgiven.

On March 31, the Treasury Department issued borrowers and lenders information sheets modifying certain terms set forth in the CARES Act, such as the interest rate or maturity of the loans and forgiveness conditions. On April 3, the Treasury issued additional guidance on the definition of “affiliate” for purposes of the Payback Protection Program (see here). The guidelines exempt relationships among faith-based organizations “if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.” Treasury has also periodically issued FAQs on eligibility and application requirements under this program (see here).

Economic Injury Disaster Loans (EIDL)

The CARES Act made an additional $10 billion available to fund new Economic Injury Disaster Loans until Dec. 31, 2020, which was increased by $50 billion under the PPPHCE Act; these loans provide economic support to small organizations, including a large range of nonprofit (tax code Section 501(c)(3) organizations, and also Sections 501(c)(4) and 501(c)(6)) organizations, and allow them to pay fixed debts, payroll, accounts payable and other costs.

Certain eligibility criteria and waivers are similar to those under the Paycheck Protection Program (i.e., organizations of similar sizes are eligible, and neither personal guaranties nor proof that credit could not be obtained from other sources are required), with certain additional requirements such as an acceptable credit history.

Terms for the EIDL loans include the following:

  • Loans can be up to $2 million each based on actual economic injury from the pandemic, with a $10,000 emergency advance–which is not required to be repaid–available within three days of the submission of an application. Treasury subsequently clarified that the emergency advance will actually be paid at $1000 per employee (counted as of Jan. 31, 2020), up to a maximum of $10,000;

  • Interest rate of 2.75% for nonprofits (vs. 3.75% for other corporations);

  • Maturity of up to 30 years; and

  • Terms are generally set based on each borrower’s ability to repay; however, EIDL loans are not eligible for forgiveness.

SBA Express Loans

The SBA also provides for 36-hour loan approval for SBA Express loans to small business and nonprofits meeting the same eligibility criteria as set forth above. Such loans can remain outstanding for up to seven years. The CARES Act increases the maximum amount of such loans from $350,000 to $1,000,000 through Dec. 31, 2020.

TREASURY’S ECONOMIC STABILIZATION LOANS FOR MID-SIZED BUSINESSES

Under title IV of the CARES Act, Treasury is authorized to use up to $500 billion to make loans, to provide guaranties to facilitate private lending, and to backstop Federal Reserve programs and other lending programs to provide eligible businesses, states and municipalities access to liquidity.

One of the loan programs would provide financing to banks and other lenders that make direct loans to eligible mid-sized businesses with 500 to 10,000 employees, which includes nonprofit organizations. The program is for entities whose uncertain economic conditions make the loan necessary to support ongoing operations. All such loans would have an annualized interest rate of no greater than 2.0% per annum, and for the first six months, no principal or interest payments would be due.

These loans will be subject to certain conditions, which may be relevant to nonprofits, including that the applicant make a good faith certification that:

  • The loan proceeds will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until Sept. 30, 2020;

  • The applicant intends to restore at least 90% of its workforce as of Feb. 1, 2020, and to restore all compensation and benefits to its workforce no later than four months after the termination of the current federal public health emergency; and

  • The applicant will not abrogate existing collective bargaining agreements and will remain neutral in union organizing efforts.

The loans will be subject to restrictions on executive compensation until one year after the loan or loan guarantee is no longer outstanding, including a requirement that officers and employees with total compensation exceeding $425,000 in 2019 do not receive total compensation in any subsequent year greater than their 2019 compensation amount, or severance pay greater than twice their 2019 total compensation amount (including salary, bonuses, and other financial benefits).

Under the CARES Act, the Treasury Department is given broad authority to define the terms of this program, and implementing regulations are expected shortly.

The Treasury has also announced two new lending facilities as part of a Main Street Lending Program to facilitate financing to small and medium-sized businesses through banks, which might be relevant for nonprofit organizations. One facility will provide 95% credit support for up to $150 million of additional bank financing to businesses with existing financing and the other facility will provide up to $25 million in bank financing for new loans, in each case with a minimum loan amount of $1 million. The facilities are available to U.S. organizations and require the borrower to make certain attestations, including the following:

  • the borrower requires the financing based on the COVID-19 pandemic and will make reasonable efforts to maintain its payroll and retain employees;,
  • the borrower meets certain leveraging requirements;
  • the borrower will follow the employee compensation restrictions described above; and
  • the borrower will not use the proceeds to repay other loans.

Detailed regulations from the Treasury implementing these programs are expected soon.

TAX BENEFITS

Tax Deductible Donations

  • Individual donors who claim the standard deduction in 2020 will be able to claim a new non-itemized deduction of up to $300 for cash charitable contributions made in 2020. It is estimated that generally around 85% of taxpayers claim the standard deduction each year, and this provision may encourage charitable giving among such taxpayers. The Joint Committee on Taxation has indicated that a married couple filing jointly is treated as a single individual for this purpose and is allowed only a $300 deduction for the couple.

  • Individual donors who itemize will not be subject in 2020 to the current cap of 60% of adjusted gross income on their cash charitable contributions–in other words, donors will be able to claim up to 100% of their adjusted gross income as charitable contribution deductions for cash gifts.

  • Corporations are generally subject to a cap on charitable contributions of 10% of taxable income, but that cap is increased from 10% to 25% of taxable income for cash charitable contributions in 2020. For partnerships or S corporations, the increased contribution deduction limits are applied at the partner or shareholder level.

The increased charitable contribution rules apply only to cash charitable contributions to Section 501(c)(3) charitable organizations, private operating foundations, certain governmental entities, or other “50% charities,” and not certain private foundations, donor advised funds, or section 509(a)(3) supporting organizations. The rules do not apply to stock or other in-kind charitable contributions.

Employee Retention Tax Credit

Nonprofits (i) whose operations were fully or partially suspended due to governmental orders related to COVID-19, or (ii) which had a year-on-year gross receipts decrease of at least 50% generally in one or more quarters in 2020, may receive a refundable credit against payroll taxes equal to 50% of qualified employee wages and qualified health care expenses paid from March 13, 2020, to Dec. 31, 2020, with up to $5,000 of tax credits per employee. For nonprofits with more than 100 full-time employees, only wages and health care expenses paid between March 13 and Dec. 31, 2020 with respect to employees not providing services or generally not working for all paid hours, due to either of the reasons above, qualify for the tax credit.

Nonprofits receiving emergency SBA Paycheck Protection Program loans are not eligible for this tax credit.

Employer Payroll Tax Deferral

The CARES Act increases cash liquidity for nonprofits by allowing employers to defer and pay in installments the employer portion of the Social Security tax (currently 6.2% of up to $137,700 of wages per employee annually) due from March 27, 2020, through Dec. 31, 2020. The first half of such deferred taxes would be due on Dec. 31, 2021, and the second half on Dec. 31, 2022. Medicare taxes and the employee portion of the Social Security tax are due in the same manner as before the CARES Act.

Nonprofits which had a SBA loan forgiven under the CARES Act are not eligible for this tax deferral. If a nonprofit defers some payroll taxes and later has a SBA loan forgiven, the previously deferred payroll taxes remain deferred until 2021 and 2022.

Unrelated Business Taxable Income and Net Operating Losses

The CARES Act changes the net operating loss (NOL) rules to permit taxpayers to use losses more quickly, including by claiming refunds for previously paid federal income taxes. Nonprofits with unrelated business taxable income subject to the unrelated business income tax may elect to carry back NOLs generated in 2018, 2019 or 2020 for five taxable years, and to claim refunds of taxes paid during the five-year carryback period. The CARES Act also repeals the limitation that post-2017 NOLs can only offset 80% of unrelated business taxable income in 2018 through 2020, to permit full use of all NOLs in those years. The NOL carryback rules may interact in complex ways with the “siloing” rules that generally segregate losses and NOLs from a nonprofit’s different trades or businesses in 2018 and later. Treasury issued proposed regulations concerning the “siloing” rules on April 23, 2020, which reserved on the NOL carryback issues.

UNEMPLOYMENT BENEFITS

The CARES Act provides federal funding to state programs that pay benefits to employees whose hours are reduced, and who are kept working on a reduced schedule. This is to provide incentives to employers to reduce employees’ hours rather than resort to layoffs.

In addition, the CARES Act may make it easier for nonprofits to rehire employees and independent contractors by expanding unemployment benefits and allowing unemployed individuals to remain available. In particular, the CARES Act extends unemployment benefits to independent contractors and those with limited work history, increases unemployment benefits by $600 per week until July 31, 2020, and funds 13 additional weeks of benefits for individuals who have exhausted state unemployment benefits through Dec. 31, 2020.

EMERGENCY GRANTS FOR HEALTHCARE AND EDUCATION

The CARES Act sets aside significant amounts to be used to support specific sectors and programs, including approximately $31 billion for education to allow institutions to reallocate resources toward initiatives in fighting the pandemic and to alleviate financial burdens on students, and $100 billion for a Public Health and Social Services Emergency Fund to support eligible healthcare providers in responding to COVID-19, both domestically and internationally, and to cover expenses or lost revenues that are attributable to the coronavirus. The PPPHCE Act provides an additional $75 billion for eligible health care providers for such purposes, as well as $25 billion for necessary expenses to research, develop, validate, manufacture, purchase, administer, and expand capacity for COVID-19 tests.

Public Health and Social Services Emergency Fund Eligibility

Eligible healthcare providers are public entities, Medicare or Medicaid enrolled suppliers and providers, and such for-profit entities and not-for-profit entities as the Secretary of Health and Human Services (the “Secretary”) may specify, that provide diagnoses, testing, or care for individuals with possible or actual cases of COVID–19.

Conditions

The conditions placed on the use of such funds include:

the funds may not be used to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse;

the eligible healthcare provider must submit reports and maintain documentation as the Secretary determines is needed; and

funds appropriated may be used for the building or construction of temporary structures, leasing of properties, medical supplies and equipment including personal protective equipment and testing supplies, increased workforce and trainings, emergency operation centers, retrofitting facilities and expanding surge capacity.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Carol E. Rosenthal is a partner with Fried Frank in New York, Michael T. Gershberg is a partner in Washington, Stewart A. Kagan is a partner in New York, and
Libin Zhang is a partner in New York.

Thanks to Sylvie Goursaud, who was instrumental in preparing this article, and thanks to Corey T. Flick for his early assistance on this article.

Please also see our Client and Friends Memorandum, “Update on CARES Act Small Business Loans and Analysis of the Affiliation Rules as Applied to PE Portfolio Companies”, dated April 4, 2020, which includes additional detail regarding eligibility and details of the SBA Paycheck Protection Program. To access the memo, click here.

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