Government Stimulus Gives Nonprofit Sector Options to Mitigate COVID-19 Fallout
By Aaron Fox, Partner, Nonprofit Tax Services
There has been a flurry of legislative and administrative responses to the global Coronavirus pandemic. This article summarizes provisions that might be useful to nonprofit organizations as they attempt to navigate the current troubling economic landscape.
The Families First Coronavirus Response Act (FFCRA) was signed into law on March 19, 2020. The Act has a wide ranging focus, addressing food nutrition security, unemployment benefits, paid leave, free health testing, and more. On March 27, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The historic $2 trillion legislation is aimed at helping individuals directly, as well as states and businesses that are suffering as a result of the pandemic.
There are a number of provisions available to help the unemployed and states providing benefits to the unemployed. In order to support the deluge of unemployment requests, FFCRA created $1 billion in emergency grants to states for unemployment benefits. Further, the Secretary of Labor is being instructed to assist states in setting up work-sharing programs. Such programs would allow employers to reduce hours instead of laying off employees, while the employees could claim partial unemployment benefits for wage losses. The CARES Act allots $250 billion to states to expand unemployment benefits. Self-employed and independent contractors, like Uber drivers and other gig workers, can receive unemployment during this public health emergency. The Act adds a $600/week payment increase in unemployment benefits through the end of July, and for those needing it an additional 13 weeks of benefits beyond what states typically allow. This expansion in unemployment benefits is set to expire at the end of 2020.
A cornerstone of the CARE Act is that all U.S. residents meeting certain income ceilings will receive up to $1,200 per person and $2,400 per married couple, plus $500 for each qualifying child. Amounts begin to phase out with adjusted gross income (AGI) over $75,000 per person and joint filers over $150,000, becoming fully phased out at AGI of $99,000 for individuals and $198,000 for joint filers. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as Supplemental Security Income (SSI) benefits. Most Americans will not be required to take action to receive a rebate check, as the IRS will use taxpayer’s 2019 tax returns if filed or, in the alternative, their 2018 returns.
Food and Nutrition Services
FFCRA allocates $1 billion in nutritious foods to various charitable classes served by nonprofits, including low-income pregnant women, mothers with young children, senior citizens, and food banks. The provisions also bolster free and reduced lunch assistance to households with children who would normally receive free or reduced-price meals if not for their schools being closed due to coronavirus. The USDA will receive $100 million for nutrition assistance grants to Puerto Rico, American Samoa, and the Commonwealth of the Northern Mariana Islands. Finally, 25 million additional home-delivered and pre-packaged meals will be provided to low-income seniors who depend on the Senior Nutrition program.
There are several provisions in these bills that address sick, family and medical leave. CARE introduces a tax credit for certain employers that are subject to closure due to COVID-19. The credit is applicable against employment taxes for each calendar quarter equal to 50% of qualified wages for each employee per quarter. The amount of wages taken into account for all calendar quarters is limited to $10,000. The employer must take into account any credits received from FFCRA in calculating eligible wages. An eligible employer is one that (a) was carrying on a trade or business during calendar year 2020; and (b) with respect to any calendar quarter for which (i) operation is fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel, or group meeting due to COVID-19 or (ii) in which there has been a significant decline in gross receipts. Beginning in the first calendar quarter after 12/31/2019, a decline in gross receipts occurs if the entity has less than 50% gross receipts in a quarter compared to the same quarter in the prior year, and ending with the calendar quarter for which gross receipts are greater than 80% of the same calendar quarter in the prior year. For nonprofit organizations, the trade or business and COVID-19-related limitations are considered to apply to all such entities.
FFCRA provides that employers with fewer than 500 employees (and all public sector employers) are required to provide paid sick leave of 2 weeks for full-time employees due to an isolation or quarantine order or advisory, or are experiencing symptoms, or caring for a family member or for a child whose school or care provider is closed due to public emergency. Further, such employers are required to provide up to 12 weeks of job-protected leave to employees to care for a child whose school or care provider is closed. Employers would be required to pay two-thirds of the wages of these employees, not to exceed $200 per day and $10,000 in aggregate. Since the majority of the nonprofit sector is comprised of organizations with fewer than 500 workers, these provisions will be a major benefit to employees impacted by COVID-19. The Labor Department is authorized to exclude certain healthcare providers and small business with fewer than 50 employees. In order to fund these benefits, employers may claim a 100% refundable payroll tax credit on wages associated with paid sick and medical leave as required in the bill, as well as expenditures associated with additional health benefit contributions. Any additional wages paid due to the leave requirement will not be subject to the employer portion of the payroll tax. Although nonprofit organizations generally do not have income tax, they are able to apply this credit against their payroll taxes. The law has built in a waiver of penalties on anticipating the payroll tax credit for not making proper payroll tax deposits.
A provision in the CARES Act allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2 percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Charitable Deduction Modification
The CARES Act modifies the rules for charitable deductions. The ceiling limitation on deductions for charitable contributions is increased for 2020 as follows: 1) For individuals who itemize, the 50% AGI limitation is suspended for 2020; 2) For corporations, the 10% net income limit is increased to 25%; 3) the limitation on deductions for contributions of food inventory is increased from 15% to 25%. Also, the Act creates an above-the-line deduction of up to $300 of cash contributions to charities this year. This means donors may benefit from the deduction whether they itemize or not. Such a provision may pave the way for a more permanent above-the-line deduction, for which the charitable sector has been lobbying in recent years.
Net Operating Loss limitation rules have been eased to allow losses from 2018, 2019 and 2020 to be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. Such changes were critically important when they were enacted during the 2008 recession and are expected to be equally as important this go-around. At this point, it is assumed the NOL provisions would apply to nonprofit corporations reporting UBIT. Nonprofits with large net operating loss carryforwards should capitalize on this provision by amending prior Form 990-Ts to reclaim taxes paid in those years.
Small Business Loans
The CARES Act would provide relief for small businesses up to $300 billion for loan guarantees and subsidies via the Small Business Administration. Businesses, including nonprofits, can apply for fee-free loans up to $10 million to help in paying payroll, employee salaries, mortgages, rent and certain debt obligations. Under the CARES Act, the loan period for this program would begin on February 15, 2020, and end on December 31, 2020. The program would cover businesses with fewer than 500 employees (unless the covered industry’s SBA size standard allows more than 500 employees). The legislation as currently drafted excludes from eligibility nonprofit organizations that receive Medicaid reimbursements. Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations. These loans are potentially forgivable if the organization spends the funds during an eight-week period after the origination date on the following items: 1) payroll costs; 2) interest payment on any mortgage incurred prior to February 15, 2020; 3) payment of rent on any lease in force prior to February 15, 2020; and 4) payment on any utility for which service began prior to February 15, 2020. Loan forgiveness will be reduced for certain employee reductions, such as layoffs or wage reductions. More information on the loans program is available here as part of the Marcum Coronavirus Resource Center.
Also, the Act authorizes $10 million for grants to minority business centers for the purpose of providing counseling, training and education on federal resources and business response to COVID-19 for small businesses.
Corporations can defer payment of estimated tax payments due after the date of enactment to October 15, 2020, with no cap. This would apply to nonprofits with estimated payments for unrelated business income tax. It is important to monitor whether a nonprofit’s state has automatic conformity to federal tax law changes to determine if the payment deferral applies at the state level.
Filing and payment deadlines for individuals and corporations have been extended, with no apparent relief for nonprofits in sight. The National Association of College and University Business Officers has written a letter to the IRS Commissioner and Secretary Mnuchin urging them to grant a 90-day filing and payment extension for exempt organizations in accordance with their fiscal year filing dates and extension dates. Coupled with the complications created by the coronavirus pandemic, the nonprofit sector is still waiting for section 512(a)(6) guidance (re: UBIT silos), and final rules have yet to be promulgated on the excise taxes on compensation and net investment income. At this time, the filing deadlines for Form 990s and tax payments has not changed.
If you have any questions, do not hesitate to contact your Marcum tax professional or contact Frank Smith, Nonprofit Tax Leader, at 202.227.4120 or email Frank.
Coronavirus Resource Center
Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.