The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the most significant of a series of recent legislative acts enacted to address the economic downturn spurred by the COVID-19 pandemic. The CARE Act’s primary goal is to provide cash flow relief to organizations severely impacted by a loss of business operations during the COVID-19 pandemic.
Not-for-profits should be aware that a host of provisions are available to them. Additionally, the act provides specific stimulus checks to individuals that will put money in the hands of the vast majority of Americans.
The most significant provisions impacting NFPs include:
- Allowing NFPs described in Internal Revenue Code (IRC) Section 501(c)(3) – or Veteran’s organizations under Section 501(c)(19) - with 500 employees or less (or those of a size defined by the Small Business Administration (SBA)) to qualify for no-fee loans up to $10 million. If the SBA Loan is used to fund certain payroll or occupancy costs (mortgage, rent or utilities), it may be eligible for forgiveness, thus converting it into a federal grant.
- Providing $10 billion in funding for emergency Economic Injury Disaster Loans (EIDLs) that include an immediate “grant” of up to $10,000 for NFP organizations that apply for an EIDL. The EIDLs are loans of up to $2 million and carry interest rates 2.75% for nonprofits. These loans may be used to cover payroll costs, supply chain interruptions, rent or mortgage payments and debt or similar repayment obligations.
- Providing grants to resource partners that educate the public on prevention of COVID–19.
- Directs the Treasury to create a Mid-Sized Business Program offering loans to companies, including nonprofits, with 500 to 10,000 employees capping interest at 2% in return for retaining employees. This has not yet been established.
- Funding to states to reimburse governmental and NFP entities up to half of unemployment insurance benefits provided by them.
- Increasing the taxable income limit on corporate charitable deductions from 10% to 25% and contributions of food inventory from 15% to 25%.
- Deferring payment requirements for employers who do not receive certain debt forgiveness, for the 6.2% employer portion of Social Security taxes from the date of enactment through the end of 2020, with half the balance due by the end of 2021, and the other half due by the end of 2022.
- Allowing credits against payroll taxes of employees unable to work during the covered period (with the “unable” qualification not applicable to those with less than 100 employees) up to $5,000 in wages paid (50% of wages with limit of $10,000). This provision is not eligible for employers receiving the SBA Paycheck Protection Program loans.
- Allowing net operating losses (NOLs) arising in tax years 2018, 2019 and 2020 to be carried back five years and suspending the 80% taxable income limit until 2021.
- Increasing the taxable income threshold for the Section 163(j) limit on the interest deduction from 30% to 50% for tax years beginning in 2019 and 2020 and allowing taxpayers to use 2019 taxable income to calculate the 2020 limit.
Of the many individual tax provisions included within the CARES Act, the centerpiece is the COVID-19 stimulus check 80% of all American families will begin to receive within the next three weeks. Eligibility for the stimulus checks are as follows:
- Individuals with adjusted gross income (AGI) up to $75,000 a year are eligible for the full $1,200 check. Reduced checks will go out to individuals making up to $99,000 a year.
- Married couples are eligible for a $2,400 check as long as their AGI is under $150,000 a year. Reduced checks, on a sliding scale, will go out to married couples who earn up to $198,000.
- Individuals filing as Head of Household with an AGI of $112,500 will, likewise, receive $1,200. Reduced checks, on a sliding scale, will go out to Head of Households who earn up to $146,500.
- Individuals will receive an additional $500 for every qualifying child under 17.
Other CARES Act provisions impacting individuals include:
- Allowing above-the-line charitable cash contribution deductions not exceeding $300 for eligible individuals who do not itemize deductions (excluding contributions to donor advised funds and supporting organizations).
- For those taxpayers who itemize on their tax returns, removing the AGI limitation for charitable contributions of cash in 2020 (excluding contributions to donor advised funds and supporting organizations).
- Waiving early withdrawal penalties from qualified retirement accounts for COVID-19-related withdrawals of up to $100,000, (and allowing it to be paid back or included ratably in income over three years).
- Doubling the amount taxpayers can borrow from certain qualified retirement accounts to $100,000 with delayed repayment start dates.
- Suspending for 2020, required minimum distribution rules for certain retirement plans and accounts, including 401(k) and 403(b) defined contribution plans, 457(b) defined contribution plans (if the plan is maintained by a 457(e)(1)(A) employer) and individual retirement accounts.
- Permanently restoring the ability for taxpayers to use health savings accounts and flexible spending arrangements to purchase over-the-counter medicine.
- Excluding employer student loan repayment assistance of up to $5,250 from income in 2020.
- Increasing unemployment benefits for individuals who become unemployed because of the COVID-10 epidemic (above amounts paid by a state). The benefit is an extra $600 per week over the next four months.
While most of these provisions are designed to provide quick access to cash, the immediate deferral of the employer’s portion of Social Security taxes is particularly impactful. Taxpayers will have various options for claiming many of the benefits, including amending prior tax returns, via their 2019 returns, or filing for a tentative refund.
Taxpayers should assess their options carefully before acting, as different filing positions can affect when a taxpayer receives a benefit and the ultimate size of the benefit. The following provides more details on each of the provisions.
NFP organization benefits
Paycheck Protection Program
The CARES Act entitles NFPs with 500 employees or less (or those of a size defined by the SBA) to qualify for non-recourse loans (with no personal guarantee or collateral required) so long as the loans are being used for an authorized purpose. Loan amounts used to cover payroll and healthcare benefit costs (up to $100,000 of compensation for individual employees), interest payments on mortgages, rent, utilities and certain debt obligations will be eligible for forgiveness.
Unlike traditional SBA loans, no personal guarantees or collateral pledges are needed and nonprofits do not need to show they can’t obtain credit elsewhere, rather they just need to certify the funds will be used for the above purposes and are not receiving duplicative funds for the same use.
The most attractive feature of these loans, however, is that they are partially (up to eight weeks of eligible expenses) convertible to grants upon forgiveness. Loans are issued with the understanding that the employer won’t lay off employees nor cut their regular paycheck. If an employer continues to pay workers through June, the amount of the loans that go toward eligible costs would be forgiven.
The maximum amount of the loan allowed will be the lesser of (1) a multiple of payroll costs and outstanding loans made in certain periods of 2020 and (2) $10,000,000. In addition, the Small Business Administration will waive the fees ordinarily applicable to these types of loans.
Grant Thornton Insight: While these SBA loans provide a much-needed safety net for tax-exempt organizations struggling to meet their cash needs, they need to be mindful that taking advantage of these loans may disqualify an organization from utilizing other credits and provisions of the law. Your organization would be well-served to analyze the various aid being offered to select the ideal aid package for your organization.
In addition, we note that while the originally drafted bill excluded NFPs that receive Medicaid reimbursements (such as nursing homes, community health centers, and homes for adults with disabilities) from eligibility for these SBA loans, the final bill does allow these organizations to qualify for such funding.
The CARES Act offers emergency grants of up to $10,000 for those tax-exempt organizations seeking an SBA Loan. These grants are deemed to be loan advances that will not be required to be paid back even if the applicant is subsequently denied an SBA loan. These emergency grants must be used for the aforementioned purposes -- to meet payroll, rent, utilities or payments on existing debt obligations. Grants will be available until Dec. 31, 2020.
COVID–19 prevention and education grants
The CARES Act provides grants to certain resource partners, including small business development centers and women’s business centers, that engage in providing education, training, and advice regarding operational issues faced by small businesses during the coronavirus crisis. Operational advice includes guidance and training on the hazards and prevention of the transmission and communication of COVID–19 and any other relevant business practices necessary to mitigate the economic effects of COVID–19.
Grant Thornton Insight: These prevention and education grants offer an opportunity for resource partners to partner with smaller NFPs so that those organizations can alleviate resource constraints and continue to provide their core mission-related services.
Payroll tax relief
Many tax-exempt organizations have been forced to shutter their operations and send their employees home with or without paid leave. The CARES Act allows NFPs to defer deposits of the 6.2% employer portion of the Social Security tax for Old Age, Survivors, and Disability Insurance (OASDI) from the date of enactment through the end of the year. Half of the deferred payment amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. This relief will not be
available to NFPs that receive loan forgiveness under the SBA loan program identified above. Individuals paying self-employment tax are afforded equivalent relief.
The CARES Act also provides a refundable payroll tax credit of up to 50% of qualified wages per employee. NFPs can qualify if they were fully or partially suspended by government order or have a reduction in revenue of at least 50%. The credit is based on qualified wages paid to the employee from March 13, 2020, through Dec. 31, 2020, and up to $10,000 of compensation, including health benefits, paid to an eligible employee.
Employers with an average or more than 100 employees are eligible for a credit on employees who are unable to provide services because of COVID-19-related circumstances. For NFPs with under 100 employees, all employee wages qualify for the credit whether the employer is open for business or not. This credit will not be
available to NFPs that obtain loans under the SBA loan program identified above.
Grant Thornton Insight: The combination of payroll tax relief and the refundable payroll tax credit should provide significant cash-flow flexibility to assist small and mid-sized tax-exempt organizations to weather the COVID-19 crisis. In addition, the IRS recently issued administrative relief for both estimated and income tax payments due on April 15, that should help address cash flow issues.
Net operating losses are a valuable asset for tax-exempt organizations; the CARES Act makes them even more valuable by allowing NOLs arising in tax years beginning after Dec. 31, 2017, and ending before Jan. 1, 2021, to be carried back for five years. This is another mechanism to put more cash into the coffers of struggling organizations by allowing them to recoup previously paid in tax. When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, a provision limited the use of NOLs (arising in tax years beginning after Dec. 31, 2017) to 80% of taxable income. The Act temporarily suspends this limitation, enabling organizations to use 100% of the NOL for all tax years beginning before 2021.
NOL carrybacks will not be allowed to offset the Section 965 inclusion for those taxpayers subject to the one-time repatriation tax. NOLs will still be allowed against other income in the inclusion year, but it is unclear whether the reduction of liability will be applied against Section 965 installment payment or allowed as a refund. Taxpayers have the option to elect to forgo applying the carryback to a tax year with a Section 965 inclusion.
Grant Thornton Insight: Lawmakers declined to add a “haircut” requiring corporate NOL carrybacks to be applied using the current 21% rate. The ability to carry back current NOLs to pre-TCJA years will potentially offer a tremendous opportunity for NFPs to use deductions and losses against a higher tax rate. The impact of the “bucketing” rules for unrelated business income, enacted as part of the TCJA, is an additional factor to be considered. For organizations generating a loss in the current filing period, but who have taxable income in prior years, careful analysis should be performed before the organization files the current year return to determine whether it would like to elect out or utilize the carryback.
Section 163(j) interest limitation
The CARES Act generally allows taxpayers to make an election to limit their Section 163(j) net business interest deduction to 50% of taxable income instead of 30% for tax years beginning in 2019 and 2020. The bill also allows taxpayers to elect to use their 2019 taxable income to calculate their 163(j) limit for 2020. Partnerships cannot use the 50% threshold in the year beginning in 2019, but the business interest allocated to a partner via a Schedule K-1 (in a tax year beginning in 2019) will be reclassified as business interest expense and not subject to the limit at the partner level in 2020 (unless the partner elects out).
Grant Thornton Insight: Organizations with substantial investment portfolios comprised of limited partnership investments should be aware of these elections. We note that the IRS is very close to releasing final and proposed regulations under Section 163(j), that may also affect the calculation and should factor into a decision on whether to make these elections.
Individual tax relief
Tax credit rebates
Many Americans are irrevocably impacted by the Coronavirus epidemic. Whether it be job layoffs, reduced hours or reduced pay, individuals are suffering economically from an inability to work in their normal job capacities. The CARES Act looks to put cash back in the pockets of low-to-middle class Americans. Subject to an income-based phase-out, for the first tax year beginning in 2020, the CARES Act offers a cash payment of $1,200 for individuals ($2,400 for joint taxpayers) plus $500 per qualifying child. The credit begins to phase out at the adjusted gross income of $75,000 (single), $112,500 (head of household) or $150,000 (joint), and it is fully refundable, which means the Treasury will be cutting checks to Americans within the next three weeks.
The TCJA caused a large drop in the number of taxpayers who itemize deductions. This essentially rendered the charitable contribution deduction worthless for most families. The CARES Act looks to mitigate this result by allowing an above-the-line deduction for cash charitable contributions of up to $300 for those taxpayers that do not itemize. For taxpayers that do itemize, the ACT removes the 60% AGI limit on charitable deductions to public charities only (e.g. – gifts to donor-advised funds and supporting organizations do not qualify). This adjustment to the AGI limit applies to all charitable gifts of cash and not solely to those gifts given for COVID-19 disaster relief efforts.
Grant Thornton Insight: Lawmakers declined to improve the above-the-line charitable deduction by raising the cap from $300 to $4,000, (a bi-partisan amendment that more than 700 NFPs endorsed), or to allow all taxpayers to immediately claim the deduction on their 2019 taxes due this April. Nevertheless, the above-the-line charitable contribution deduction incentivizes charitable giving and may enable tax-exempt organizations to regain much of the decline in charitable giving that resulted after passage of the TCJA in 2017.
Early withdrawals and required minimum distributions
The CARES Act waives early withdrawal penalties for up to $100,000 in COVID-19-related withdrawals from qualified retirement accounts. The taxpayer has the option of repaying the amount (without tripping that year’s cap on contributions) and incurring no tax. If the taxpayer does not repay it, the income is included ratably over three years beginning with the year of the withdrawal. Individuals may make eligible distributions if they are diagnosed with COVID-19, have a spouse or dependent diagnosed with COVID-19, or suffer adverse financial consequences from a quarantine, layoffs or reduced hours due to business issues or lack of childcare. Employees can self-certify that they are eligible.
The legislation separately raises the limit on borrowing from an account from $50,000 to $100,000 (with the 50% vested accrued benefit limit also doubled), so taxpayers could, in some circumstances, temporarily withdraw as much as $200,000 from an account by combining the distribution provision and the loan. Retirees who would normally take required minimum distributions from their Section 401(k), 403(b), and certain 457(b) plans retirement savings can waive them for 2020.
The CARES Act permanently expands reimbursable expenses for HSAs and FSAs to include over-the-counter medicine, reversing a change from the Affordable Care Act. Menstrual products are added to the list of reimbursable expenses. Finally, the act eases restrictions on direct primary care services and telehealth services with HSA high-deductible plans.
Lawmakers clearly prioritized immediate relief as most of the act’s provisions are designed to provide quick access to cash, and all taxpayers will have various options for claiming many of the benefits, including amending prior returns, via their 2019 income tax return, or filing for a tentative refund. There may also be opportunities to enhance benefits by pairing the new incentives with other tax planning strategies (i.e. the NOL carryback). NFPs should assess their options carefully before acting, as different filing positions can affect when the NFP will receive the benefit and the ultimate size of the benefit.
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