divider

CARES Act: Guidance for Nonprofit Entities

separator

By: Stephen Zaharias, William Reddington, Pierre Chabot, and Kathleen Peahl

March 31, 2020

This is the second installment in Wadleigh, Starr & Peters’ whitepaper series on the  “Coronavirus Aid, Relief, and Economic Security Act,” or “CARES Act,” the 880-page legislation signed into law this past Friday to provide emergency financial support to individuals and businesses across the country. This whitepaper will focus on the ways that nonprofit entities may tap into the funds allocated under the CARES Act, hopefully putting them in a better position to continue operating and retain employees through this unprecedented economic downturn. 

This publication is a summary of key portions of the CARES Act as it relates to nonprofits; it does not include all of the details and specifics found in the many hundreds of pages of legislative text, or seek to predict the contents of the significant regulatory guidance that is forthcoming. If you have any specific questions, you should consult with counsel. Of course, the attorneys at Wadleigh, Starr & Peters, PLLC are here to address your questions and concerns  about the CARES Act.  

Forgivable Loans Pursuant to the Paycheck Protection Program

The first avenue of relief for nonprofit organizations is the Paycheck Protection Program.  This program provides eligible entities, including certain nonprofit organizations, defined below,  with loans to help cover payroll costs, costs related to the continuation of group health care benefits, employee salaries and commissions, payments of interest on mortgage obligations, rent, and utilities.[1] The maximum amount of such a loan, which is capped at $10 million per entity, is based upon a formula tied to payroll costs.[2]

The only nonprofits that are eligible for a loan through the Paycheck Protection Program are 501(c)(3) organizations and veterans’ organizations as described in Section 501(c)(19) of the Internal Revenue Code.[3] Churches, religious organizations, religious schools and other nonprofit entities are eligible for loans through the Paycheck Protection Program only if they have an exemption through section 501(c)(3) or 501(c)(19) of the Internal Revenue Code.   

In addition to the required 501(c)(3) or 501(c)(19) status, to be eligible the nonprofit must have fewer than 500 employees.[4] Employees of affiliated nonprofits may be counted toward this 500 employee cap, depending upon the degree of control of the parent organization.[5] These loans are available to eligible nonprofits that were operational as of February 15, 2020 and that had paid employees during this time period.[6]

Loans made pursuant to the Paycheck Protection Program have a maximum maturity of 10 years and an interest rate that cannot exceed 4%.[7] Payment of principal, interest and fees on such loans will be automatically deferred for a period of at least six months.[8]

The CARES Act also provides for forgiveness of loans through the Paycheck Protection Program. Eligible nonprofits can have some or all of their loan forgiven, to the extent that the organization uses the loan to cover up to 8 weeks of payroll costs, interest payments on mortgages, rent and utilities, and to the extent that the organization maintains its employee payroll for that period.[9] However, the amount forgiven is subject to several limitations, many of which are designed to incentivize nonprofits to retain their employees at their current compensation levels.[10] For example, the amount of the loan subject to forgiveness will be reduced proportionately by the employer’s reduction in its number of employees and by any reduction in employee compensation beyond a 25% reduction (as compared to the previous quarter).[11]   

Some key benefits of these loans include the fact that loan forgiveness can be excluded from gross income, and several requirements typically imposed by the Small Business Act for loans are waived, including certain fees, the requirement of a personal guarantee, and the requirement that the borrower attempt to obtain credit elsewhere.[12] In these ways, the CARES Act should streamline the loan application process, making it easier and quicker for eligible organizations to obtain loans quickly.

This legislation gives eligible nonprofits a significant opportunity to obtain assistance in meeting the unprecedented economic challenges that they are currently facing. The complexities of this portion of the CARES Act and the numerous requirements and limitations imposed by the CARES Act with respect to nonprofits, however, mean that an attorney or other appropriate advisor should be consulted to discuss these matters. This is especially so given that participation in the Paycheck Protection Program could render a nonprofit ineligible for other benefits presented by the CARES Act, including certain tax credits that may otherwise be available under the Families First Coronavirus Response Act.

Economic Injury Disaster Loans and Emergency Advances

Private nonprofit organizations – including nonprofits other than 501(c)(3) and 501(c)(19) organizations – are also eligible for Economic Injury Disaster Loans or “EIDLs” under Section 7(b)(2) of the Small Business Act.[13] In addition to EIDL eligibility, the CARES Act provides that any private nonprofit organization that applies for an EIDL may request an advance on such loan, up to $10,000, which may be used to cover paid sick leave to employees unable to work due to the direct effects of the coronavirus, to maintain payroll and retain employees, to meet increased costs to obtain materials, make rent or mortgage payments, and to repay obligations that cannot be met due to revenue loss.[14] This advance need not be repaid, even if the EIDL application is subsequently denied.[15]

Please note that if an organization receives an advanced payment and another loan (such as a Paycheck Protection Loan), the advanced payment may reduce the forgiveness amount for any other loan received through the CARES Act.[16] Additionally, the CARES Act waives certain EIDL requirements, including the requirement that a borrower provide a personal guarantee for loans up to $200,000, that the eligible nonprofit be in operation for one year prior to the disaster (except that the nonprofit must have been in operation on January 31, 2020), and that the borrower be unable to obtain credit elsewhere.[17]

The EIDL provisions of the CARES Act will provide a valuable source of emergency relief to many nonprofits that are struggling right now due to the coronavirus outbreak. 

Employee Retention Tax Credit

Certain nonprofit organizations may be eligible for a refundable payroll tax credit up to 50% of wages paid after March 12, 2020 and before January 1, 2021,[18] and up to $10,000 per employee.[19]

To be eligible, a nonprofit organization – including those nonprofits beyond 501(c)(3) and 501(c)(19) organizations – must show that it carried on a trade or business during 2020, and (1) in any calendar quarter, the business was fully or partially suspended due to orders from an appropriate governmental authority as a result of the coronavirus, or (2) had a significant decline in gross receipts of at least 50% percent, as compared to the gross receipts of the same quarter in 2019.[20] Note, though, that 501(c) organizations may be subject to additional requirements.[21]

It is highly likely that orders from various state governors – including those from Governor Sununu in New Hampshire – that have limited commerce, travel, and/or group meetings due to the coronavirus would be sufficient to meet the requirement that business was suspended due to orders from an appropriate governmental entity,[22] although additional guidance on this requirement and other requirements will likely be forthcoming in the next few weeks. 

Importantly, if a nonprofit employer receives a Paycheck Protection loan as set forth above (which, again, are limited to 501(c)(3) organizations and veterans organizations as described in Section 501(c)(19) of the Code), no employee retention tax credit will be available.[23] You should consult with counsel and/or your accounting adviser to determine which form or forms of relief make the most sense for your nonprofit.

Delay of Payment of Employer Payroll Tax

Nonprofit organizations may also be entitled to a deferral of certain payroll taxes for 2020, spreading the payment out over the following two years.[24] This payroll tax deferment covers payroll taxes owed between March 27, 2020 and January 1, 2021.[25] Eligible employers will have until December 31, 2021 to pay 50% of their 2020 payroll taxes, and until December 31, 2022 to pay the remaining 2020 payroll taxes.[26] Such deferrals are not available to organizations that receive Paycheck Protection loans and obtain forgiveness for the same, again highlighting the importance of careful planning and analysis of the most appropriate ways to seek relief for your organization under the CARES Act.[27]

Expansion of Charitable Deductions

Certain provisions of the CARES Act incentivize charitable giving, which will likely benefit many nonprofits. For example, the CARES Act provides that individual taxpayers who do not itemize deductions may take an above-the-line deduction for qualified charitable contributions of up to $300.[28] For individuals who itemize their deductions, the CARES Act lifts the existing cap on contributions, raising it from 60% to 100% of adjusted gross income.[29] Charitable deduction limitations for corporations have also been increased from 10% to 25%,[30] while charitable contributions of food inventory are now capped at 25%, up from 15%.[31] These changes apply to tax years after 2019.[32]

Unemployment Benefits

Unemployment benefits have been significantly increased under the CARES Act. Section 2103 specifically applies to nonprofit organizations and provides that certain nonprofits – those that are self-funded – may be reimbursed by the States for up to one half of the cost of unemployment benefits provided to laid off employees.[33] This reimbursement applies to benefits paid from March 13, 2020 through the end of the year.[34] The Secretary of Labor will likely issue clarifying guidance in the coming weeks concerning these provisions.

Other Opportunities

There may be other opportunities for larger nonprofit organizations to receive economic assistance, as Section 4003 of the CARES Act provides that the Secretary of the Treasury should endeavor to make loans and investments available to mid-sized nonprofit organizations, which are defined as those nonprofits with between 500 and 10,000 employees.[35] Interest rates on these loans would be capped at 2% and no principal or interest would be due during the first 6 months.[36] To be eligible, an appropriate entity must certify among other things, that the uncertainty of the economic conditions makes the loan necessary to support its ongoing operations and that the funds will be used to retain at least 90% of the organization’s workforce at full compensation and benefits until September 30, 2020.[37] The CARES Act is silent as to whether loans under this program will be capped at a certain amount; however, we expect additional guidance regarding this program and any limitations thereof to be forthcoming in the next few weeks.[38]

As noted above, there are several additional requirements with respect to these loans that an attorney can guide you through. However, please be aware that, unlike loans through the Paycheck Protection Program, there are no provisions in the CARES Act that would make these loans to larger nonprofits forgivable. Nonetheless, such loans could provide necessary economic assistance to a nonprofit.  

Seek Counsel for Your Nonprofit

As set forth above, the CARES Act provides various forms of possible economic relief for nonprofits during these uncertain times. Such relief can help ease the financial burdens currently faced by nonprofits and hopefully provide the assistance necessary to keep a nonprofit operating while the coronavirus outbreak continues. 

However, please note that this publication is meant to serve merely as a summary of the more significant aspects of the CARES Act, as it relates to nonprofits. It is not intended to provide a comprehensive explanation of the CARES Act and does not constitute legal advice. You should consult with your attorney with respect to your organization’s unique situation.   

This publication also does not account for any of the regulatory guidance on the CARES Act that is likely forthcoming within the next 14-30 days. Nonetheless, the attorneys at Wadleigh, Starr & Peters, PLLC are carefully monitoring any additional requirements that may be announced by the SBA or other agencies in the upcoming weeks, especially as those requirements impact nonprofits. We are also here to address any other questions or concerns that nonprofits may have relative to the coronavirus, the CARES Act, and the various forms of assistance that the CARES Act may provide them. 


[1] Sec. 1102. 

[2] Sec. 1102(a)(2)(E).

[3] Sec. 1102(a)(2)(A)(vii), (ix).

[4] Sec. 1102(a)(2)(D).

[5] Sec. 1102(a)(2)(D)(vi).

[6] Sec. 1102(a)(2)(A)(vii); Sec. 1102(a)(2)(F)(ii)(II).

[7] Sec. 1102(a)(2)(K)-(L).

[8] Sec. 1102(a)(2)(M).

[9] Sec. 1106.

[10] Sec. 1106(d).

[11] Sec. 1106(d)(2)-(3).

[12] Sec. 1102(a)(2)(H)-(J)Sec. 1106(i).

[13] Sec. 1110(b). It is unclear to us at this time if the 500-employee limit applicable in other portions of this bill will apply here; we assume so, but the statutory text is not as clear.

[14] Sec. 1110(e)(3)-(4).

[15] Sec. 1110(e)(5).

[16] Sec. 1110(e)(6).

[17] Sec. 1110(c).

[18] Sec. 2301(m).

[19] Sec. 2301(a), (b)(1).

[20] Sec. 2301(c)(2)(A)-(B).

[21] Sec. 2301(c)(2)(C).

[22] Sec. 2301(c)(2)(A)-(B).

[23] Sec. 2301(j).

[24] Sec. 2302.

[25] Sec. 2302(d)(2).

[26] Sec. 2302(a)(1)-(d)(3).

[27] Sec. 2302(a)(3).

[28] Sec. 2204.

[29] Sec. 2205(a)(2)(A).

[30] Sec. 2205(a)(2)(B).

[31] Sec. 2205(b).

[32] Sec. 2205(c)

[33] Sec. 2103(b).

[34] Sec. 2103(b).

[35] Sec. 4003(c)(3)(D)(i).

[36] Sec. 4003(c)(3)(D)(i).

[37] Sec. 4003(c)(3)(D)(i)(I)-(X).

[38] Sec. 4003(c)(1)(B).