Impact of the CARES Act on Tax-Exempt Entities

Many of the provisions implemented by the CARES Act provide certain non-profit and tax-exempt organizations with opportunities for economic relief. The following is a summary of pertinent provisions as related to non-profit organizations.

1. Paycheck Protection Program—Available to 501(c)(3) and 501(c)(19) organizations

Although other SBA programs are limited to for-profit businesses, the Paycheck Protection Program established by Section 1102 of the CARES Act includes the following non-profit, tax-exempt organizations in the definition of eligible businesses:

• non-profit organizations under Section 501(c)(3) of the Internal Revenue Code

• veteran organizations under Section 501(c)(19) of the Internal Revenue Code

Non-profit organizations that are exempt under the other provisions of 501(c) of the Internal Revenue Code are not explicitly eligible for the Paycheck Protection Program.

The Paycheck Protection Program allows 501(c)(3) and 501(c)(19) organizations that have fewer than 500 employees (or fewer than the number set by the SBA for the specific industry) to apply through qualified lenders (and not through an application to the SBA itself) for a loan up to $10 million. Repayments under these loans are deferred for at least 6 months. Interest rates applicable to non-profit organizations are capped at 4%, and under recent SBA guidance, it is proposed that rates are to be capped for all recipients at 1%. The SBA’s proposed Interim Final Rule is available at: https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf

Loans provided under the Paycheck Protection Program can be used for eligible payroll costs, compensation to employees (however, the annual salary must be less than $100,000 per employee), costs with continuing health care benefits, rent, utilities, mortgage interest, and interest on other debt obligations that were incurred prior to February 15, 2020. According to the Interim Final Rule published by the SBA, a loan under the Paycheck Protection Program can also be used to refinance an SBA Economic Injury Disaster Loan made between January 21, 2020 and April 3, 2020. Additionally, if leave wages are covered by the Families First Coronavirus Response Act, then such wages are not covered by the Paycheck Protection Program. For a summary of the benefits provided under the Families First Coronavirus Response Act and additionally under New York State legislation, please see our Legal Briefing available at https://www.lawpf.com/post/covid-19-and-paid-leave-benefits.

As indicated in a prior Pullano & Farrow Legal Briefing, available at https://www.lawpf.com/post/the-cares-act-and-its-impact-on-small-businesses, the maximum principal amount of the loan is the lesser of:

• 2 ½ times the average monthly total payroll costs incurred in the one-year period before the loan is made (with considerations for seasonal businesses);

• 2 ½ times the average monthly total payroll costs from January 1, 2020 to February 29, 2020 (for start-up businesses); or

• $10 million.

Eligible non-profit organizations will not need to demonstrate that they can obtain credit elsewhere, and instead, the applicant must make certain certifications:

• The uncertainty of the current economic conditions makes the loan necessary to support the ongoing operations of the recipient

• The funds will be used to retain workers and maintain payroll or to make mortgage payments, lease payments, and utility payments, and the recipient does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received

• During the period February 15, 2020 through December 31, 2020, the recipient has not received (and will not receive) amounts under this Program for the same purpose and duplicative of the amount applied for

A sample application has been made available by the SBA, available at: https://www.sba.gov/document/sba-form--paycheck-protection-program-borrower-application-form and https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf

The application opens April 3, 2020, and non-profits are encouraged to reach out to approved lenders to start this process to avoid delays in application processing and availability of funds.

For information on Loan Forgiveness under Section 1106 of the Cares Act, see our prior Legal Briefing, available at https://www.lawpf.com/post/the-cares-act-and-its-impact-on-small-businesses.

2. Emergency Economic Injury Disaster Loans and Grants/Advances—available to all non-profit, tax-exempt entities under 501(c), 501(d), and 501(e)

Unlike the Paycheck Protection Program, non-profit, tax-exempt entities under 501(c), 501(d), and 501(e) with fewer than 500 employees are eligible to apply for Emergency Economic Injury Disaster Loans. Eligible organizations can receive loans in amounts up to $2 million and interest rates are capped at 2.75% for non-profit organizations, with terms up to 30 years. These loans may be used to pay fixed debts, payroll, accounts payable, and other bills that cannot be paid due to the COVID-19 pandemic.

The Emergency Economic Injury Disaster Loan Program has been modified to deal with the COVID-19 pandemic and many of the typical requirements for these types of loans have been waived or modified.

The covered period for these loans runs from January 31, 2020 through December 31, 2020. During the covered period, the CARES Act requires waiver of the following: (i) rules related to personal guarantees on advances and loans up to $200,000, (ii) the requirement that an applicant needs to be in business for one year before disaster, provided that the business must have been in place on January 31, 2020, (iii) the requirement that the applicant be unable to receive credit elsewhere.

Applicants can be approved solely on credit score or through some other means which will determine an applicant’s ability to repay.

Applicants are permitted to request a $10,000 grant/advance on the loan, which will be paid to the applicant within 3 days of applying for the loan. Applicants who receive the grant/advance but are ultimately denied a loan are not required to repay the grant/advance. Therefore, all eligible applicants are encouraged to apply for these loans.

The SBA’s Application for a COVID-19 Economic Injury Disaster Loan is available at: https://covid19relief.sba.gov/#/.

Note: For 501(c)(3) and 501(c)(19) organizations, any funding received under the Paycheck Protection Program and through an Economic Injury Disaster Loan will need to be used for separate purposes.

3. Additional Topics:

The following is a brief summary of additional benefits that are applicable to non-profit organizations through the CARES Act.

Unemployment Benefits

The Pandemic Unemployment Assistant program implemented by CARES Act allows non-profit organizations to be reimbursed for half of the costs incurred through the end of the 2020 to pay unemployment benefits.

Payroll Tax Deferral

The CARES Act also implements modifications to payroll tax liability of employers, including non-profit organizations. Employers may defer payment of payroll taxes from March 27, 2020 through December 31, 2020, with half of such amount delayed until December 31, 2021 and the other half delayed until December 31, 2022.

Employee Retention Credits

Eligible employers are allowed a credit against employment taxes for each calendar quarter in an amount equal to 50% of the qualified wages per employee. The amount of qualified wages per employee, however, is limited to $10,000 for all calendar quarters. This credit applies to wages paid from March 13, 2020 through December 31, 2020. Certain wages will apply, depending on whether the employer has more than one hundred full time employees.

Employers who receive funding through the Paycheck Protection Program are also not eligible to receive retention credits.

Expanded Charitable Deductions

Limits on deductions for both individuals and corporations for cash contributions made to charitable organizations in 2020 have been suspended. Individuals can now deduct up to 100% of adjusted gross income and the limit for corporations has been increased from 10% to 25% of taxable income.

Our firm is diligently monitoring all state and federal laws and regulations as it pertains to COVID-19. If you have any questions about this legal briefing, please contact any member of our Firm at 585-730-4773. Please note that any embedded links to other documents may expire in the future.

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This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2020 Law Offices of Pullano & Farrow PLLC

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