March 30, 2020

The Impact of the CARES Act Upon Nonprofit Organizations

The global COVID-19 pandemic has impacted our communities and the nonprofit organizations that provide critical services in significant ways. Below, we highlight recent congressional action, identify the unique opportunities for nonprofit organizations, and point you toward helpful resources.

In response to the COVID-19 pandemic, Congress has passed, and President Trump has signed, two significant pieces of legislation that are summarized below.

The Families First Coronavirus Response Act (FFCRA) (H.R. 6201)

FFCRA was signed into law on March 18, 2020, and will go into effect on or before April 2, 2020. The FFCRA creates obligations for many employers to provide temporary relief to eligible employees affected by the COVID-19 pandemic. The FFCRA contains two separate laws that provide such relief: a new paid sick leave benefit called the Emergency Paid Sick Leave Act (EPSLA) and an expansion of the Family and Medical Leave Act (FMLA), called the Emergency Family and Medical Leave Expansion Act (EFMLEA).

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748)

The CARES Act was signed into law on March 27, 2020. At 880 pages, it will take days to unpack all of the details in this relief package. However, we take this opportunity to draw your attention to the provisions of the CARES Act that present an immediate opportunity for the nonprofit sector:

  • It provides incentives to increase charitable giving as a result of the pandemic.
  • It provides tools (loans and loan forgiveness) to assist nonprofits in paying salaries and avoiding potential layoffs.
  • It provides a series of grants and loan programs.
  • It provides additional relief for employers in terms of payroll and unemployment insurance and related taxes.

A link to the CARES Act can be found here, and our firm’s analysis is here.

Charitable Giving Incentives

  • Above the line deduction for non-itemizers: An individual who does not itemize deductions may take a one-time “above the line” deduction of up to $300 for cash charitable contributions made during 2020 to public charities. The deduction does not apply to contributions made to supporting organizations or donor advised funds.
  • Removal of cap on deductibility of cash contributions:
    • For individuals, cash charitable contributions made to public charities in 2020 (other than to supporting organizations or donor advised funds) may be deducted without regard to the current caps (e.g., it lifts the current cap that permitted contributions up to 60% of adjusted gross income for cash contributions to public charities).
    • For corporations, the deductibility cap for charitable gifts is increased from 10% to 25% of the corporation’s taxable income.
    • The 15% deducibility caps currently applicable to food inventory contributions are increased to 25%.

Relief for Small Nonprofits (500 or fewer employees)

  • Paycheck Protection Program: A nonprofit organization exempt under Internal Revenue Code Section 501(c)(3) (which would include public charities and private foundations) can apply through its lender for a loan which can be used for payroll costs, group health care costs, utility payments, and mortgage or rent obligations. Borrowers will be required to certify that the current economic conditions necessitate the loan, that it will use the proceeds for the purposes outlined above, and that it has not (and will not) receive duplicative funds from the federal government during 2020.
    • Repayment of these loans is guaranteed by the US Small Business Administration (SBA). This loan guarantee is intended to incentivize approved banks and nonbank lenders to make funds available quickly to qualifying businesses (including 501(c)(3) organizations).
    • The federal guarantee applies without the requirement of a personal guarantee or any collateral.
    • Interest rates on these loans cannot exceed 4%, and principal and interest payments may be deferred for six to 12 months.
    • Notably, this program does not apply to 501(c)(4), (6) or (7) organizations, among others.
  • Loan forgiveness under the Paycheck Protection Program:
    • 501(c)(3) organizations (which, again, would include public charities and private foundations) may be eligible for loan forgiveness under this new program if they keep staff on the payroll between March 1 and June 30 (covered period). This, in essence, turns the loan into a general operating support grant. Under this provision of the CARES Act, organizations may be eligible for forgiveness of indebtedness on a covered SBA loan in an amount equal to the cost of maintaining payroll continuity during the covered period. The payroll costs eligible for loan forgiveness do not include (a) the compensation of an individual employee in excess of $33,333 during the covered period; (b) qualified sick leave wages for which a credit is allowed under section 7001 of the FFCRA (see links to FFCRA and FAQ above); or (c) qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA.
    • The amount of loan forgiveness may be reduced if an organization reduces the number of FTEs during the covered period as compared to (i) February 15, 2019 – June 30, 2019, or (ii) January and February 2020, or if it reduces the pay of any qualified employee (generally those making less than $100,000 in 2019) by more than 25% as of the most recent calendar quarter prior to the covered period.
    • An organization must apply for loan forgiveness by submitting to its lender the required documentation. It is supposed to receive a decision within 60 days. To receive loan forgiveness under this program, the organization will be required to make a good faith certification that the uncertainty of current economic conditions justifies the loan request to support its ongoing operations, and to acknowledge that funds will be used to retain workers and maintain payroll.
  • Advance grants for Economic Injury Disaster Loans: A “private nonprofit organization” with 500 or fewer employees, when applying for an economic injury disaster loan (EIDL) with the SBA, may receive up to $10,000 as an advance against the EIDL within three days of application if SBA verifies that the entity is eligible.
    • This advance need not be repaid, even if the borrower is denied an EIDL.
    • EIDL funds may be used to maintain payroll, provide sick leave, or make mortgage or rent payments, among other purposes allowed by the EIDL program.
    • The SBA may use only credit scores to determine eligibility for COVID-19-related EIDL applications.
    • The phrase “private nonprofit organization” suggests that nonprofits in addition to 501(c)(3) organizations (e.g., 501(c)(4), (6), and (7) organizations, among others) may be eligible for this program, as distinguished from the Paycheck Protection Program.

Relief for Larger Nonprofits (500-10,000 employees)

  • The “Economic Stabilization Fund,” also referred to as the “Treasury Industry Stabilization Loan Program,” provides for $500 billion in financial assistance to a range of businesses, $454 billion of which would be for “eligible businesses including, to the extent practicable, nonprofit organizations” with between 500 and 10,000 employees.
  • It is uncertain whether, or how much, nonprofits will be able to benefit from this program due to the bill’s “to the extent practicable” language.
  • This fund would provide direct financing at interest rates not to exceed 2%. Principal and interest payments may be deferred for six months.
  • An employer would be required to certify that:
    • It will use the loaned funds to retain at least 90% of its workforce, at full compensation and benefits, through September 30, 2020.
    • It intends to restore at least 90% of its workforce existing as of February 1, 2020, and restore all compensation and benefits to its workers no later than four months after the end of the COVID-19 public health emergency.

Nonprofit Employment Protections

The CARES Act provides relief to employers in multiple ways as it relates to meeting payroll, paying taxes and meeting their other federal obligations. A comprehensive summary of those issues can be found here.

Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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