The U.S. government has approved far-reaching legislation to provide relief to American families, businesses, and not-for-profit organizations. Two significant bills are the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
FFCRA created new obligations and tax credits for employers and addresses food nutrition security, unemployment benefits, paid sick leave, free health testing, and other support for individuals affected by COVID-19. CARES Act injected cash into the economy to help individuals, states, businesses, and not-for-profits that are suffering as a result of the pandemic. Be sure to check out our initial overview of FFCRA here as well as a suite of analysis of the CARES Act available on our COVID-19 Financial Updates page.
This article summarizes specific provisions that may be useful to not-for-profit organizations as they attempt to navigate the current landscape.
Food and Nutrition Services
With schools’ meals programs closed and food banks strained to meet increased demand, FFCRA allocates $1 billion in nutritious foods to various in-need classes served by not-for-profits including low-income pregnant women, mothers with young children, senior citizens, and food banks. The provisions also bolster free and reduced lunch assistance to households with children who would normally receive free or reduced-price meals at their schools. The USDA will receive $100 million for nutrition assistance grants to Puerto Rico, American Samoa, and the Commonwealth of the Northern Mariana Islands. Additionally, 25 million home-delivered and pre-packaged meals will be provided to low-income seniors who depend on the Senior Nutrition program.
Delay of Employer Payroll Tax Payments
A provision in the CARES Act allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government for their employees. Employers generally are responsible for paying a 6.2% Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Increased Charitable Deduction for Donors
The CARES Act modifies the rules for charitable deductions and increases the ceiling limitation on deductions for charitable contributions for 2020 as follows:
- For individuals who itemize, the 50% AGI limitation is suspended for 2020;
- For individuals who take standard deduction, the Act creates an above-the-line deduction of up to $300 in cash contributions to not-for-profit organizations this year. This means donors may benefit from the deduction that would not be included otherwise.
- For corporations, the 10% net income limit is increased to 25%; and
- The 15% limitation on deductions for contributions of food inventory is increased to 25%.
Net Operating Loss
Net operating loss (NOL) limitation rules have been eased to allow losses from tax year 2018, 2019, and 2020 to be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. Such changes were critically important when they were enacted during the 2008 recession, and they are expected to be equally as important during this crisis. It appears the NOL provisions will apply to not-for-profit corporations reporting unrelated business income tax (UBIT). Not-for-profits with large NOL carryforwards should capitalize on this provision by amending prior Forms 990-T to reclaim taxes paid in those years.
Emergency SBA Loans
The CARES Act provides economic relief for eligible small not-for-profits via the Small Business Administration (SBA) loan programs: Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL). The programs covers organizations with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees). Certain not-for-profit organizations can be qualified for both loans.
Eligible borrowers are required to make good faith certification that they have been affected by COVID-19 and will use the funds to retain workers and maintain payroll and other debt obligations. As new guidance is released by the SBA, it is important for not-for-profits to consider the good faith certification carefully. Take a few minutes to read our assessment of some recent PPP explanations here.
Under the PPP, a portion of this loan is potentially forgivable if the organization spends the funds during an eight-week period after the origination date on the following items:
- Payroll costs;
- Interest payment on any mortgage incurred prior to February 15, 2020;
- Rent payment on any lease in force prior to February 15, 2020; and
- Utility payment on service began prior to February 15, 2020.
PPP Loan forgiveness will be reduced for certain employee reductions, such as layoffs or wage reductions, in the eight weeks after the origination of the loan, unless the same employees will be rehire by June 30, 2020.
Corporations can defer payment of estimated tax payments due April 15th, 2020 to October 15, 2020, with no cap. This would apply to not-for-profits with estimated payments for UBIT. It is important to monitor whether a not-for-profit’s state has automatic conformity to federal tax law changes to determine if the payment deferral applies at the state level as well.
Emergency Unemployment Relief for Self-Insured Not-for-profits
501(c)(3) organizations that elect to self-insure, rather than paying state unemployment tax, will be reimbursed for 50% of the costs incurred through the end of 2020 to pay unemployment benefits arising due to COVID-19.
Federal Tax Filing Deadline Extension for Not-for-profits
The federal tax returns and payments that are due (originally or with a valid extension) on or after April 1, 2020, and before July 15, 2020 have been extended to July 15, 2020. These include:
- Form 990-T Exempt Organization Business Income Tax Return and other related payments and return filings;
- Form 990 Return of Organization Exempt From Income Tax and proxy tax under section 6033(e);
- Form 990-PF Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation and excise tax payments
- Form 4720; Return of Certain Excise Taxes under Chapters 41 and 42 of the Internal Revenue Code;
- Quarterly estimated income tax payments calculated on or submitted with Form 990-W; and
- Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations.