In a wave of legislation designed to combat the global economic impacts of COVID-19, Congress has enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act (FFCRA).
At a high level and among many other things, the Acts provide:
- $349 billion in loan funds for small businesses and nonprofit employers, with a loan forgiveness opportunity;
- Loan funds for larger businesses and nonprofits;
- Increased amounts for income tax charitable deductions;
- Employment tax and benefits relief; and
- Expanded paid sick leave and family and medical leave.
This alert provides a brief summary of some of the key provisions of both Acts that apply to nonprofit organizations. We have also included information for organizations that are unable to pay rent and are considering whether to seek a rent abatement or deferral.
Small Business Loans
Paycheck Protection Program (PPP)
One of the core pieces of the CARES Act is the Paycheck Protection Program (“PPP”) that will generally provide loans for up to $10 million. The CARES Act explains that 75 percent of the loan proceeds must be used for payroll costs. The PPP is administered by the Small Business Administration (“SBA”) as a temporary addition to its 7(a) loan program. The CARES Act dictates that entities are eligible if they have (1) 500 or fewer employees with a principal place of residence in the United States (including full-time, part-time, or other status) or (2) fit within the SBA size standards, which could exceed 500 employees in certain industries. On April 4th, SBA clarified that because it may not have established size standards for all the industries in which nonprofits work, applicants are eligible for the PPP if they “employ not more than 500 employees or, if applicable, the SBA employee-based size standard for the industry in which the organization or business operates.”
Eligible entities could include nonprofit organizations that are organized under sections 501(c)(3) and 501(c)(19) of the Internal Revenue Code and were in operation on February 15, 2020. Faith-based organizations, such as churches, that meet the requirements of section 501(c)(3) of the Internal Revenue Code are eligible for loans under the PPP program. Other types of nonprofit organizations, such as 501(c)(6) trade associations, would not be eligible under the program.
Nonprofits will be subject to the SBA’s affiliation rules. The SBA will consider the number of employees of both an applicant and an applicant’s “affiliates” when determining loan eligibility. In general, an affiliate is another company or other legal entity that has an ownership interest in a business and the ability to control that business but the rules on affiliation are detailed and fact specific.
In addition to payroll costs, which include salaries, wages, tips, paid sick or medical leave, dismissal and separation allowances, health benefits and insurance premiums, retirement benefits, and limited state and local payroll taxes, 25 percent of the loans may be used for mortgage interest, rent, utility payments, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; interest payments on other debt obligations incurred before February 15, 2020; and refinancing an EIDL made between January 31, 2020 and April 3, 2020. However, as explained below, only a subset of these costs are eligible for forgiveness.
The loan amount is the lesser of $10 million or 2.5 times the average total monthly payroll costs with special rules for seasonal employers and recently formed companies. The maximum interest rate is 1 percent.
Loan proceeds can be forgiven for loans made from February 15, 2020 through June 30, 2020, to the extent that at least 75 percent of the proceeds are used in the eight weeks following the origination of the loan to fund payroll costs (including certain benefits), with the remainder used to pay mortgage interest, rent, and utilities. Payroll costs are limited to a $100,000 cap per employee. There is ambiguity as to whether the interest owed on the loan will be forgiven.
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of the employee’s prior year compensation. However, if borrowers re-hire workers who were laid off between February 15 and April 26 and correct reductions in compensation by June 30th, then borrowers will not be penalized for having a reduced payroll during that time. Any loan balance remaining after forgiveness will continue to be guaranteed by the SBA and will have a maximum term maturity of 2 years from the date that the borrower applied for loan forgiveness.
Economic Injury Disaster Loan (EIDL) Program
Economic injury disaster loans (EIDL) are another option to provide working capital to cover ordinary and necessary business expenses during certain disasters and emergencies. These loans are available to “private” nonprofit organizations, including 501(c)(4) social welfare organizations, 501(c)(6) trade associations, with 500 or fewer employees. The SBA application indicates that a private nonprofit is an organization that: (i) is a nongovernmental entity, which has a ruling letter from the IRS granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code; (ii) an organization with satisfactory evidence from a state that it is a non-revenue producing organization that is a nonprofit organized or doing business under state law; or (iii) a faith-based organization. Under the EIDL program, and based on the EIDL application, the SBA appears to be assessing the number of employees at the beginning of the “covered period,” i.e., January 31, 2020.
Eligible applicants must either be located in a federally designated disaster area affected by COVID-19 or can qualify if the President makes an emergency declaration under Section 501(b) of the Stafford Act. An applicant’s affiliates are considered when calculating its total number of employees, subject to limited exceptions. EIDLs of up to $2 million with an interest rate of 2.75 percent are available for eligible nonprofit entities in operation before January 31, 2020. There are no up-front loan fees or prepayment penalties imposed by the SBA.
Most significantly for nonprofit organizations seeking an immediate influx of funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds may be used to provide paid sick leave to employees who are unable to work due to COVID-19, payroll costs to retain employees, increased material costs, rent or mortgage payments, or repaying obligations that cannot be met because of revenue losses.
Eligible entities may apply for both a PPL and EIDL; however, loan proceeds may not be used for duplicative purposes. If a borrower receives a $10,000 EIDL advance as well as a PPL, the advance reduces the amount of the PPL that is ultimately forgiven.
For additional information regarding the various small business loans, please see the following link.
Support for “Eligible Businesses” and Nonprofits
In addition to loan programs targeting small businesses, title IV of the CARES Act provides $500 billion in funding to provide financial assistance to U.S. businesses impacted by the COVID-19 pandemic. While some of this funding is earmarked for businesses in specified industries (e.g., air carriers and airline-related businesses), $454 billion of these funds are made available for the Treasury Department to support a broader universe of “eligible businesses,” defined as U.S. businesses that have not otherwise received adequate relief under the CARES Act. Treasury will deploy these funds by making loans to or investing capital in various liquidity facilities established by the Federal Reserve; these facilities will then either make loans directly to eligible businesses, or provide support to eligible businesses indirectly through financial institutions.
To date, the Federal Reserve has established six liquidity facilities targeting various financial markets, and has indicated that more facilities are under development – including a Main Street Business Lending Program that will provide support to small- and medium-sized businesses (not defined). Separate from the Main Street lending program, the CARES Act directs the Treasury Secretary to “endeavor to seek the implementation of” a facility that will make low-interest loans to eligible businesses, “including, to the extent practicable, nonprofit organizations,” with between 500 to 1,000 employees. Although the creation of such a facility is not strictly required, it is widely expected that the Federal Reserve establish some type of facility that provides funding support to large and mid-sized nonprofits.
Regardless of the structure of the Federal Reserve facility, eligible businesses receiving support must be solvent, must be organized in the United States, and must have significant operations in and a majority of employees based in the United States. Depending on the structure of the facility, certain other conditions may attach, including limitations on employee compensation, and a requirement that the eligible business maintain its pre-pandemic employment levels
For additional information, please see the following link.
The CARES Act provides several charitable giving incentives. First, for non-itemizers, a new above-the-line deduction for total charitable contributions up to $300 is available beginning in 2020. The contributions must be made in cash and may not be for a new or existing donor advised fund, or to a supporting organization, or organization subject to a 30 percent deduction limitation, such as a nonoperating private foundation.
Second, the CARES Act modifies certain percentage limitations on charitable “qualified contributions” made during 2020. For individuals who itemize, the CARES Act removes the deduction limitation and for corporations, increases the deductible amount from 10 percent to 25 percent. Qualified contributions are cash contributions, made in 2020, and may not be applied to a new or existing donor advised fund, or to a supporting organization, or organization subject to a 30 percent deduction limitation, such as a nonoperating private foundation. Finally, the percentage limitation for contributions of food inventory by a trade or business is increased from 15 percent to 25 percent for 2020.
Employee Retention Credit
The CARES Act created a refundable payroll tax credit for eligible organizations up to $5,000 for each employee kept on the payroll. A tax-exempt organization is an eligible employer if it carried on operations during 2020 and had its operations fully or partially suspended due to orders from a governmental entity due to COVID-19. In calculating qualified wages for purposes of determining the amount of the employee retention credit, employers with more than 100 full-time (within the meaning of Section 4980H) employees should take into account wages paid by the employer with respect to which an employee is not providing services as a result of COVID-19. For employers with 100 or fewer full-time employees, qualified wages include all wages paid, even if the employee provides services during this period.
Under the provision, eligible employers can receive a credit against the employer’s share of social security taxes (but not Medicare taxes) equal to 50 percent of the first $10,000 in wages per employee (including the value of health plan benefits). The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021. The availability of the credit would continue each quarter until the organization’s revenue exceeds 80 percent of the same quarter in 2019. Importantly, 501(c)(3) and 501(c)(19) organizations receiving emergency SBA PPP loans would not be eligible for these payroll tax credits.
The IRS is revising Form 941 to account for the credits and has recently issued a draft Form 7200 (Advance Payment of Employer Credits Due to COVID-19), along with draft instructions, that will be used by employers to claim a refund of any excess employer social security tax credits (i.e., the retention credit and the credits for paid sick leave or expanded family and medical leave for specified reasons related to COVID-19 under FFCRA) that were not offset by the withholdings on the Form 941.
Delay of Employer Payroll Tax Deposits
In addition, the law provides for a delay in depositing the employer’s share of social security taxes. All employer social security taxes otherwise required to be deposited between the date of enactment and December 31, 2020, are not be required to be deposited on the normal deposit schedule. Instead, half of such taxes are required to be deposited by December 31, 2021. The remaining deferred employer share of social security taxes are required to be deposited by December 31, 2022. Moreover, employers would need to be mindful that wage payments late in 2020 might trigger a deposit requirement on the usual schedule because the deferral is not triggered by the liability date but instead by the deposit deadline. Accordingly, the deadline for depositing the employer share of social security tax for wage payments made in late December 2020 is not deferred if the deposit deadline occurs in early 2021.
For additional information, please see the following link.
The following provides a link to a brief summary of the most salient provisions of the CARES Act applicable to employee benefits including, among others, more liberal access to tax-qualified retirement savings, suspension of required minimum distributions from tax-qualified retirement accounts, funding relief for private sector single-employer defined benefit plans, expanded health plan coverage for COVID-19 testing and prevention, and expanded unemployment assistance.
For additional information, please see the following link.
For regular updates, please follow Covington’s employee benefits blog InsideCompensation.
Expanded Employee Leave
The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with job-protected paid sick leave and expanded paid leave under the Family and Medical Leave Act (FMLA) if the employee is unable to work or telework for specified reasons related to COVID-19. Covered employers include nonprofits with fewer than 500 employees. These provisions will apply for qualifying leave taken from April 1 through December 31, 2020.
Covered employers must provide full-time employees regardless of length of service with 80 hours of paid sick time (and a proportional amount of paid hours for part-time employees) when the employee is unable to work for certain reasons related to COVID-19. Employers must also provide up to 10 additional weeks of paid FMLA leave for a “qualifying need related to a public health emergency,” defined to include circumstances where an employee is unable to work or telework due to a need to care for their minor child if their school or place of care has been closed, or the child’s care provider is unavailable, as a result of the COVID-19 public health emergency. Employees are eligible for the FMLA leave if they have been on the payroll for at least 30 calendar days prior to the need for leave, which is significantly less time than what is required for eligibility under the traditional FMLA.
PPP loans, discussed above, may not be used for leave wages covered by the FFCRA.
For additional information, please see the following link.
Rent Abatement or Deferral
Organizations that are unable to pay rent, whether it is due to inability to access the premises they lease or cash flow issues related to COVID-19, may seek a rent abatement or deferral.
There may be clauses in lease documents that provide rights to abatement or deferral due to the current situation. If there is no such clause, tenants may attempt to negotiate for abatement or deferral. Landlords are typically more amenable to rent deferrals due to requirements of the creditors and investors. A rent deferral means that rent would not be due during the rent deferral period and there would be no late fees or interest would accrue, though a landlord may request a modest interest. Repayment of the deferred rent can be structured by amortizing the rent over the remainder of the lease term and paying it as additional monthly rent, making a lump sum payment at the end of the term, or adding time to the end of the term equal to the amount of the deferral period.
If a landlord is not amenable to a rent deferral or abatement, it may be possible to request that it apply the security deposit to rent currently due and then repaying the security deposit at a later point. Lastly, an organization that is experiencing significant cash flow issues may consider not paying rent during this time. Most jurisdictions have placed a moratorium on new eviction proceedings and landlords cannot remove tenants for nonpayment of rent. If this option is chosen, it is important to remember that rent will continue to accrue and will be due, with interest and late fees, upon the lifting of the moratoria or the tenant may be evicted then.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our Tax practice:
This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein.
Covington & Burling LLP, an international law firm, provides corporate, litigation and regulatory expertise to enable clients to achieve their goals. This communication is intended to bring relevant developments to our clients and other interested colleagues.