CARES Act Benefits for Tax-Exempt Organizations

For additional guidance, please refer to Steptoe's COVID-19 Resource Center.

The House and Senate have passed "Phase Three" of a congressional response to the COVID-19 emergency, and the President signed it on Friday, March 27, 2020. The legislation, entitled the "Coronavirus Aid, Relief, and Economic Security Act" (the CARES Act) includes various provisions that will benefit many tax-exempt organizations.  

SBA Loans

The CARES Act amends the Small Business Act (SBA) to create a new Business Loan Program category, the Paycheck Protection Program, that is available to section 501(c)(3) organizations and section 501(c)(19) veterans organizations that meet the eligibility requirements. For the period from February 15, 2020 to June 30, 2020, the law allows the Small Business Administration to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. Subject to certain conditions, loan amounts are forgivable (see more detailed discussion on loan forgiveness below).  

General Loan Terms and Program Operations

The SBA allows the Administrator to provide loans directly or in cooperation with the private sector through agreements to participate on an immediate or deferred (guaranteed) basis. No collateral or personal guarantee is permitted to be required for a loan. The interest rate on loans under the program is not to exceed 4%. There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally,  there is no recourse to officers or directors of an organization for non-payment, unless the loan proceeds are used for unauthorized purposes (see discussion below of permitted uses). 

A loan made under the SBA's Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under this program to receive assistance under this program. 

Unlike prior drafts of the CARES Act, the final version contains a "Sense of the Senate" that the Administrator should issue guidance to lenders and agents to ensure that processing and disbursement of covered loans prioritizes: 

• Small business concerns;
• Entities in under-served and rural markets (including veteran communities);
• Small business concerns owned by socially and economically disadvantaged individuals;
• Women; and
• Businesses in operation for less than two years. 

Eligible Loan Recipients

A section 501(c)(3) organization or 501(c)(19) veterans organization is eligible if it employs not more than the greater of:

• 500 employees (includes full-time, part-time, and those employed on another bases); or
• If applicable, the size standard in number of employees established by the Administration for the industry in which the entity operates. 

Affiliation rules for organizations apply to include employees of affiliated entities in the 500-employee limit. These rules are based on the SBA's affiliation rules and includes as affiliated those entities that have ownership of 50% or more of stock, common management, such as common executives or directors, identity of interest, and joint ventures. 

Loan Maximum, Borrower Eligibility Requirements, and Permissible Uses

The maximum loan amount (capped at $10 million) is the lesser of: 2.5 times average total monthly payroll costs, comprised of all payments of compensation and benefits paid to employees and independent contractors, incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019), plus the outstanding amount of a loan made under the SBA's Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program. For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019, the maximum loan amount is 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020, plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program. 

There are very few borrower requirements under the new program. The requirements include a good-faith certification that:

• The loan is needed to continue operations during the COVID-19 emergency;
• Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
• The applicant does not have any other application pending under this program for the same purpose; and
• From February 15, 2020 through December 31, 2020, the applicant has not received duplicative amounts under this program. 

In addition to uses already allowed under the SBA's Business Loan Program, entities may use the loans for:

• Payroll costs;
• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Salaries, commissions, or similar compensations;
• Payments of interest on mortgage obligations;
• Rent/lease agreement payments;
• Utilities; and
• Interest on any other debt obligations incurred before the covered period. 

In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes, or independent contractors for whom the borrower paid compensation. 

Loan Forgiveness

Loans under this new program qualify for the CARES Act's broader loan forgiveness provisions. Specifically, indebtedness will be forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the eight-week period beginning at the date of origination of the loan:

• Payroll costs;
• Interest payments on mortgages;
• Rent; and
• Utility payments. 

Forgiveness amounts will be reduced for any employee cuts or reductions in wages, and borrowers seeking forgiveness of loans in whole or in part must submit certain documentation to their lender.  

Thus, the entire amount of a loan under this new program may be forgiven if the amount of the loan is spent within eight weeks on documented payroll, rent, mortgage interest, and utility payments, and the qualifying organization does not reduce its employees or wages paid under the rules of the CARES Act. The Administrator has 30 days following enactment of the CARES Act to issue regulations on the forgiveness provisions. 

Expansion of SBA Disaster Loan Program

The CARES Act also expands the SBA's Disaster Loan Program to loosen the eligibility requirements and to provide for an emergency advance. Entities, including "private nonprofit organizations" (an undefined term) applying for loans under the Disaster Loan Program in response to COVID-19, may request an emergency advance of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The Administrator is charged with verifying an applicant’s eligibility by accepting a "self-certification." Advances are to be awarded within three days of an application, and can be used for a variety of purposes including providing sick leave to employees unable to work due to direct effect of COVID-19; making rent or mortgage payments, and repaying debts that cannot be paid due to lost revenue.

If an entity that receives an emergency advance transfers into, or is approved for, a loan under the SBA Business Loan Program (described in the section above), the advance amount will be deducted from any payroll cost forgiveness amounts. 

Nonprofit Lending Programs

For organizations with more than 500 employees, the CARES Act instructs the Treasury Secretary, through the Federal Reserve, to ensure that nonprofit organizations with more than 500 and less than 10,000 employees have access to a specific loan facility with loans not higher than 2% per year and no payments due for the first six months. In order to qualify, the eligible borrower must self-certify, among other things, that the loan is necessary to support the borrower's ongoing operations, the borrower will retain 90% of its workforce until September 30, 2020, and the borrower will not outsource or offshore jobs for a period of time ending two years after repayment of the loan. There are also restrictions on executive compensation for loan recipients. 

Employee Retention Credit

The CARES Act provides a refundable tax credit of up to $5,000 per employee for certain employers. Under the provision, eligible employers can receive credit against payroll tax liability equal to 50% of the first $10,000 in wages per employee (including the value of health plan benefits). A tax-exempt organization is an eligible employer if it carried on operations during 2020 and either: (i) had its operations fully or partially suspended due to orders from a governmental entity due to COVID-19; or (ii) experienced a year-over-year reduction in quarterly gross receipts of at least 50%. Any excess credit over the amount of payroll tax liability will be refundable to employers. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021. Organizations cannot receive both the employee retention credit and the loans described above. 

Treatment of Net Operating Losses

Certain changes to the net operating loss (NOL) provisions made by the Tax Cuts and Jobs Act (TCJA) are suspended. For organizations subject to unrelated business income tax this may allow for greater utilization of losses as well as possible refunds. Specifically, the relevant provisions in the CARES Act: 

• Suspends the TCJA's 80% of taxable income limit on NOL carryovers for three years, so that the limit would not apply to carryovers from tax years beginning in 2018, 2019, and 2020; and
• Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years.

The bill does not change the UBIT silo requirements under section 512(a)(6), so organizations may need guidance to determine how these provisions would work in relation to organizations with more than one unrelated trade or business.  

Charitable Contributions

Two provisions are intended to encourage taxpayers to contribute to charitable organizations by relaxing some of the current limitations on charitable contribution deductions. 

Above the Line Deduction

First, the CARES Act allows a $300 above-the-line charitable contribution deduction for certain qualified charitable contributions. Under current law, a taxpayer may only claim a charitable contribution deduction if they elect to itemize deductions, rather than claiming the standard deduction. The number of taxpayers electing to itemize is relatively small, especially after the enactment of the Tax Cuts and Jobs Act at the end of 2017. 

Under the CARES Act, individuals who do not itemize would be allowed to claim a deduction of up to $300 for qualified charitable contributions. A qualified charitable contribution must be made in cash and cannot be made to certain charities, including donor advised funds, supporting organizations, and organizations—such as many nonoperating private foundations—that are ordinarily subject to a 30% limitation. These amendments apply to taxable years beginning after December 31, 2019, and would not be scheduled to sunset. 

Increased Donation Limitations

Second, the CARES Act would temporarily modify certain percentage limitations on charitable contributions made during 2020. Under current law, the total deduction for contributions to charitable organizations by individuals generally is limited to 50% of adjusted gross income (30% and 20% limitations apply in certain circumstances). Deductions for contributions to charitable organizations by corporations generally are limited to 10% of taxable income. In the case of charitable contributions of food, a 15% limitation applies instead. 

Under the CARES Act, the 50% limitation for individuals would be suspended for qualified contributions, and the 10% limitation for corporations would be increased to 25% for qualified contributions. A qualified contribution must be paid in cash during calendar year 2020 and cannot be made to certain charities, including donor advised funds, supporting organizations, and organizations—such as many nonoperating private foundations—that are ordinarily subject to the 30% limitation. In addition, the 15% limitation for contributions of food would be increased to 25% for any charitable contributions of food during 2020. 

Treatment of Student Loans

The CARES Act expands the definition of employer-provided educational assistance that is excluded from gross income to include up to $5,250 in student loan payments made by an employer between the date of enactment and the end of 2020.

The CARES Act also suspends involuntary collections on student loans, including by collections made through reduction of an income tax refund.