Coronavirus aid relief for tax-exempt organizations
CARES Act provisions affecting exempt organizations and their donors
TAX ALERT |
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act, or ‘the Act’) into law. The CARES Act (P.L. 116-136) provides approximately $2 trillion in funding for COVID-19 relief and contains numerous provisions affecting tax-exempt organizations and their contributors:
- Loan and grant programs
- Charitable contributions
- Unrelated business income tax
- Exempt organizations as employers
For further detail and in-depth discussions of the CARES Act, please read RSM’s comprehensive guidance on COVID-19 legislation for tax and economic relief.
Loan and grant programs
Paycheck Protection Program
Section 501(c)(3) exempt organizations and section 501(c)(19) veterans organizations are eligible to participate in the Act’s Paycheck Protection Program (PPP).
The Small Business Administration (SBA) – Business Loan Program (or PPP), established for purposes of COVID-19 related loans, generally applies to SBA loans made between Feb. 15, 2020, and June 30, 2020 to businesses, tribal governments, and nonprofit and veterans organizations that employ not more than 500 employees (including all individuals employed on a full-time, part-time, or other basis). Existing SBA affiliation rules apply to nonprofit and veterans’ organizations.
The Act provides for maximum loan amounts based on average monthly payroll costs or a maximum of $10 million. An organization receiving the loan can use the proceeds for payroll costs, group healthcare benefits, mortgage interest, rent, utilities, and interest on other debt that existed as of Feb. 15, 2020.
Loans under the Paycheck Protection Program may be forgiven if used for payroll costs, rent, mortgage interest, and utilities for mortgages, leases, and utility service in effect before Feb. 15, 2020, during an eight-week period beginning after the loan origination date. The amount forgiven (not to exceed the principal amount of the loan) will be reduced proportionally by any reduction in employees retained and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation. However, to encourage employers to re-hire any employees who have already been laid off due to COVID-19, borrowers that re-hire workers will not be penalized for having a reduced payroll at the beginning of the period. Forgiveness is reduced based on reductions in full time employees and certain reductions in compensation paid. The amount forgiven is limited to the principal amount of the loan.
Importantly, the forgiven amounts will not be included in the borrower’s taxable income.
Emergency EIDL grants
The Act expands eligibility for access to Economic Injury Disaster Loans (EIDLs) to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees from Jan. 31 through Dec. 31, 2020. Private nonprofit organizations are also eligible entities.
The Act also establishes a temporary emergency grant, through Dec. 31, 2020, in the form of an EIDL advance of up to $10,000 to eligible entities that have applied for an EIDL. Regardless of whether the eligible entity is approved for the EIDL, it will not have to repay the advance.
Direct assistance for mid-sized businesses
The Act calls for special assistance for mid-sized eligible businesses, including nonprofit organizations, with between 500 and 10,000 employees (a mid-sized business). Such direct loans are not to have an annualized interest rate higher than 2% and for the first six months (or longer, as the Secretary may determine), no principal or interest is due. An eligible business that participates in a mid-sized business program or facility must certify in good-faith that, along with several other significant representations, the loan is necessary to support the ongoing operations of the recipient and the funds it receives will be used to retain at least 90% of the recipient’s workforce at full compensation and benefits until Sept. 30, 2020.
The Act offers charitable contribution incentives to both itemizers and non-itemizers alike. In both circumstances, the donation must otherwise constitute a charitable contribution, must be a contribution of cash, and must be made to a public charity (that is neither a supporting organization (section 509(a)(3)) nor a donor advised fund (DAF) (section 4966(d) (2)), a private operating foundation, (section 170(b)(1)(A)(vii)), or a flow-through private foundation (section 170(b)(1)(A)(vii)). These charitable contributions are ‘qualified contributions.'
The Act also permits non-itemizing individuals an ‘above-the line’ charitable contribution deduction not to exceed $300 in computing their 2020 adjusted gross income (AGI). This deduction is available only to current year contributions (i.e., not carryforwards of prior year excess contributions).
Itemizer and corporate taxpayer incentives
In addition, the Act provides for charitable giving incentives to individuals who itemize and corporations by increasing charitable deduction limitations for qualified contributions made in 2020, applicable to tax years ending after Dec. 31, 2019. It also increases the limitation for the enhanced deduction for food inventory from 15% of AGI or taxable income to 25% of AGI or taxable income.
Under the Act, individuals may deduct qualified contributions up to 100% of their 2020 AGI. For ordering purposes, an individual first applies the standard AGI limitations (i.e., 30%, and 20%) to non-qualified contributions and then utilizes his/her qualified contributions up to 100% of AGI. Any excess qualified contributions are carried forward. For example, if an individual makes nonqualified contributions representing 20% of 2020 AGI, the taxpayer would be permitted to take deductions of qualified contributions of up to 80% of AGI and carry forward any excess.
Corporations may deduct qualified contributions up to 25% of 2020 taxable income. For ordering purposes, a corporation first applies the standard 10% taxable income limitation to non-qualified contributions and then utilizes its qualified contributions up to 25% of AGI. Any excess qualified contributions are carried forward. For example, if a corporation makes non-qualified charitable contributions representing 12% of taxable income, the corporation would limit the deduction to 10% of taxable income and would be permitted to take deductions of qualified contributions of up to an additional 15% of taxable income and carry forward any excess.
The Act requires the taxpayer to make an election to treat contributions as qualified with respect to this provision. In the case of contributions made by a partnership or S corporation, the election rests with the partner or shareholder.
Unrelated business income tax
Numerous provisions throughout the Act may be of interest to exempt organizations with unrelated business income, specifically:
Modifications for net operating loss (NOL) provisions
The Act suspends the 80% taxable income limitation on the use of NOLs for taxable years beginning before Jan. 1, 2021, allowing a full offset of taxable income. Further, the Act provides that losses arising in tax years 2018, 2019, and 2020 create an NOL carryback to each of the prior five taxable years. As was the case under pre-2018 law, taxpayers may elect to waive the carryback and instead treat losses arising in those years as NOL carryovers.
RSM observation: It is unclear at this time whether the NOL carrybacks to tax years beginning on or before Dec. 31, 2017, will be generally available against unrelated business taxable income or limited to the trades or businesses generating such losses pursuant to section 512(a)(6).
Modification to the alternative minimum tax (AMT) credit
The Act accelerates the payment of AMT credit refunds to corporations. Where a corporation has an AMT credit from a prior taxable year, the corporation is permitted to use it as a refundable tax credit. The Act accelerates availability of these AMT credits, providing that the full remaining refundable AMT credit will be available for a corporation’s first taxable year beginning in 2019. Alternatively, a corporation may elect to use 100% of its AMT credits for its first taxable year beginning in 2018.
Modification of the limitation on business interest
The Act makes significant changes to the broadly applicable business interest deduction limitation rules of section 163(j), which permit many taxpayers to deduct a greater amount of interest expense. The general limitation on the amount of deductible business interest expense is increased from 30% of adjusted taxable income (ATI) to 50% of ATI for taxable years beginning in 2019 or 2020. For a taxable year beginning in 2020, taxpayers may elect to apply section 163(j) to their ATI from their last taxable year beginning in 2019 instead of to their current-year ATI.
Modification to loss limitation rules for tax-exempt trusts
The Act defers the date of the ‘excess business loss’ limitation provision preventing tax-exempt trusts from claiming losses that exceed $250,000 to tax years beginning after Dec. 31, 2020. Taxpayers previously subject to the excess business loss limitation can now recognize those losses on their 2019 tax returns, and those who were subject to the limitation on their 2018 filings may file amended returns to claim those losses and request a refund.
Exempt organizations as employers
Several employment-related provisions contained in the Act may be of interest to exempt organizations in their role as employers, including:
Employee retention credit for employers subject to closure due to COVID-19
The Act provides for a credit to offset the effects of COVID-19 related business interruptions. The credit will be available to all qualified employers, including tax-exempt organizations, that were required to suspend operations due to COVID-19.
RSM observation: The Act specifically permits an eligible exempt organization to claim the credit with respect to all of its shuttered operations, regardless of whether such operations constitute an unrelated trade or business.
This credit is generally allowed for 50% of qualified wages for each qualified employee, including health care plan expenses that are allocable to wages in a group health plan, and capped at $10,000 per employee. Qualified wages cannot include any wages considered in the Families First Coronavirus Response Act (FFCRA). The employer must also exclude an employee if such employee is included in a work opportunity tax credit, and the employer cannot use wages used to compute the paid family and medical leave credit enacted in the 2017 Tax Cuts and Jobs Act. Finally, an employer is not eligible if they are taking a small business interruption loan.
This credit applies to offset employment taxes after they are reduced by credits for employment of qualified veterans, research expenses for qualified small businesses, and the payroll credits for either qualified required paid sick leave or required paid family leave under the FFCRA. Any amount in excess of these limitations is refundable under sections 6401(a) and 6413(b) and treated as other refunds under section 1324.
The credit does not apply to government employers and can be elected out of by an employer.
Delay of payment of employer payroll taxes
The Act provides employers, including tax-exempt organizations, the ability to defer the employer’s matching portion of FICA taxes (Social Security and Medicare). The deferred tax liability must be paid in two installments, due Dec. 31, 2021 and Dec. 31, 2022.
Employers who have indebtedness forgiven under the Act will not qualify for the payment deferral.
Exclusion for certain employer payments of student loans
The Act provides that certain student loan payments made by employers on behalf of employees are excludable from the income of the payee. In the case of payments made after March 27, 2020 and before Jan. 1, 2021, the payment by an employer of principal or interest on any qualified education loan incurred by the employee for the employee’s education is excludable from gross income, up to $5,250.
Advance refunding of payroll tax credits
The Act amends the recently passed FFCRA by making the payroll tax credits for both required paid sick leave and required paid family leave refundable in part, when certain conditions are met, subject to the limitations and restrictions already imposed by the FFCRA. These payroll tax credits are also now allowed to be advanced to taxpayers with the use of forms and instructions yet to be released. Further, the amendments to the FFCRA also allow for the waiver of penalties for failure to deposit OASDI taxes or Tier 1 Railroad Retirement excise taxes if it is determined the failure was caused by anticipation of a credit allowed under the FFCRA
Small employer charity pension plan rules
The Act addresses the application of cooperative and small employer charity pension plan rules to certain charitable employers who have been in existence since at least 1938, conduct medical research directly or indirectly through grant making, and whose primary exempt purpose is providing services with respect to mothers and children.