The Coronavirus Aid, Relief, and Economic Security (CARES) Act became effective on March 27, 2020. The Act allows for the injection of approximately $2.2 trillion into the economy to provide businesses and nonprofits with forgivable loans to avoid employee layoffs, to support the healthcare industry, to shore up other critical, adversely affected industries, and to create numerous other incentives for individuals, nonprofits, and businesses. Such unprecedented financial relief seeks to promote our entire country's recovery, through the current financial, economic, and public health maelstrom.
This article focuses on provisions in the Act that will affect nonprofit organizations’ financial operations, their employer-related financial responsibilities, and financial assistance for employees and other individuals. The Act contains numerous additional provisions not covered in this article, many of which may affect specific individuals or businesses. The text of the full Act can be found at this link.
Big Money – Big Picture
Generally, key financial aspects of the CARES Act include the following:
- $350 billion in loans to small businesses and 501(c)(3) organizations, subject to partial forgiveness;
- Payments of up to $1,200 for individual taxpayers, increased by $500 for each child, subject to phase out above certain incomes;
- An additional $600 per week for individuals receiving unemployment benefits;
- $100 billion in funding to hospitals, including nonprofit hospitals, to ensure health care providers continue to receive the support they need for COVID-19-related expenses and lost revenue; and,
- An additional $500 billion to the Treasury Department’s Exchange Stabilization Fund to be administered by the Department of Treasury and Federal Reserve, for financial assistance to nonprofits and businesses.
Program Funding and Benefits for Nonprofit Operations, Employers, and Employees
Here are the CARES Act’s main nonprofit-related programs and benefits.
Paycheck Protection Program (Section 1102)
For the period from February 15, 2020 to June 30, 2020, small businesses and nonprofits (501(c)(3) only) with 500 or fewer employees may seek loans through the Small Business Administration. Eligible recipients can receive loans for as much as $10 million or 250% of their average monthly payroll costs over the last 12 months. Interest rates for the loans are capped at 4% and loans can be used to cover payroll costs, mortgages, and utilities. Recipients may not use loan money to pay employees over $100,000 annually or to pay emergency sick or family leave under the Families First Coronavirus Response Act. (For more information about that legislation, see our recent Expanded Paid Leave and Unemployment Benefits for American Workers Impacted by COVID-19 blog.) Loans must be initiated by June 30, 2020 and require a “good faith certification” that the funds will be used to retain workers and maintain payroll and other essential expenses.
Significantly, these loans are eligible for “loan forgiveness” for portions of the loan spent on costs including payroll, rent, mortgage obligations and utilities during the eight-week period beginning on the origination date of the loan (Section 1106). The amount of the loan forgiven is reduced in proportion to the amount an employer reduces its number of employees during the eight-week period. In order to determine any possible reduction, the Act allows employers to compare the number of employees during the eight-week period with either the average number of employees per month between February 15, 2019 and June 30, 2019, or the average number of employees per month between January 1, 2020 and February 29, 2020.
Disaster Loans (Section 1110)
These are low-interest loans with terms potentially as long as 30 years. The SBA will waive certain eligibility rules for disaster loans made in response to COVID-19 and may advance as much as $10,000 to existing and newly eligible disaster loan recipients within three days of receiving their applications. Advanced funds do not have to be repaid and can be used to pay sick leave due to COVID-19, to retain employees, to make rent or mortgage payments, and to repay debt. These loans are available to businesses and nonprofit organizations with not more than 500 employees, as well as sole proprietorships and independent contractors.
Payroll Tax Deferral (Section 2302)
Employers will also be able to defer payment of the 6.2 percent Social Security payroll tax. The deferred tax must be paid over the next two years, half by December 31, 2021 and the other half by December 31, 2022. This provision is not available for employers who have received SBA loan debt forgiveness.
Employee Retention Credit (Section 2301)
To incentivize employers to keep workers on the payroll during the coronavirus crisis, a refundable credit against employer payroll and railroad retirement taxes will be available for certain employers affected by the coronavirus but retain their employees. The credit will be for 50% of eligible employee wages paid after March 12, 2020, and before January 1, 2021. It will be provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee.
The credit is available to nonprofit employers whose operations were fully or partially suspended due to a COVID-19-related shut-down order.
The credit is based on qualified wages paid to the employee. For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19 related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
Employers that receive a loan under the SBA Paycheck Protection Program for 7(a) loans are not eligible. Additionally, wages taken into account for the paid leave credits established under the FFCRA cannot be used for the employee retention credit.
Pandemic Unemployment Assistance
The Act drastically expands unemployment benefits, effectively extending unemployment insurance through December 31, 2020, to allow workers laid off or otherwise out of work for COVID-19-related reasons, up to four months of enhanced benefit payments. The Act increases the maximum unemployment insurance benefit by $600 per week (Section 2104). This amount is in addition to the base amount that state unemployment programs pay. The Act also provides a thirteen-week extension of regular benefits for workers who remain unemployed weeks after state benefits are no longer available (Section 2107).
These unemployment benefits are available to employees for organizations of all sizes, as well as for the self-employed, freelancers, and gig workers. Such benefits are also available for furloughed employees, who are still getting health insurance but not receiving a paycheck (Section 2102), and for part-time workers and those who are unavailable to work for COVID-19 related reasons are also covered. Notably, churches, church-controlled religious entities, and nonprofits with less than four employees are not covered by state unemployment systems. However, their employees are now eligible to receive unemployment benefits based on their coverage under the CARES Act.
The Act also incentivizes relief to nonprofits in the form of payments to states for half the costs nonprofits incur through December 31, 2020 to pay unemployment benefits (Section 2103). This benefit is available for nonprofit organizations that have elected the reimbursement method for unemployment insurance coverage.
Work-sharing Programs (Section 2108)
The Act further provides pro-rated unemployment benefits for reductions in lieu of layoff. States will have 100% of costs covered through December 31, 2020 for programs implemented to prorate unemployment benefits to offset work reductions made by employers in lieu of layoffs. Seasonal and temporary workers are not eligible.
Increased Charitable Contribution Deductions
An additional nonprofit-related boon is the CARES Act’s $300 above-the-line charitable contribution allowance for individuals, to incentivize charitable giving. (Section 2204). This provision would allow individuals who do not itemize to deduct up to $300 from their income for donations to charitable organizations. The Act also suspends the 2020 limit on the individual charitable deduction (50% of AGI) for taxpayers who do itemize (Section 2205). The charitable deduction limit for corporations also increases for 2020, from 10% to 25%. Notably, contributions to 509(a)(3) supporting organizations and to donor advised funds are excluded and cannot be deducted under these provisions.
Other Notable Nonprofit-Related Provisions
The CARES Act additionally provides resources or grant opportunities for nonprofits including the following:
- $1.3B for awards to community health centers to prevent and treat COVID-19;
- $425M for substance abuse and mental health services, including funds for certified community behavioral health clinics, to increase access to mental health care services and grants to address mental health, substance abuse, and homelessness;
- $3.5B in grants to states for assistance to child-care providers to prevent them from going out of business and to support child-care for families;
- $1B in community services block grants to local community-based organizations to provide a wide range of social services and emergency assistance;
- $50M for the Legal Services Corporation, which funds nation-wide legal aid clinics to address the increased need for legal services due to coronavirus; and
- An amendment to the definition of Cooperative and Small Employer Charity plans, related to pension plan rules, to include nonprofit medical research organizations whose primary exempt purpose is to provide services with respect to mothers and children.
The Act also includes several provisions providing relief to state and local schools, including public charter schools, as well as numerous specific provisions affecting the delivery of health care and MEDICAID /MEDICARE coverage.
The above list is only a summary of certain provisions of the CARES Act, which is nearly 900 pages in length and includes close to 200 sections. A word of caution: many provisions mandate specific procedures and include stringent requirements and exclusions. The CARES Act may be important – even pivotal – for nonprofits’ financial ability to carry on their missions through the coronavirus crisis. To ensure full legal compliance and maximum benefit, nonprofit leaders should proceed carefully, deliberately, and prudentially, and with legal, tax, and accounting professionals consulted as appropriate.
Our law firm will continue to evaluate and monitor the CARES Act’s implications and other coronavirus-related developments, as part of our dedicated service to our nonprofit clients and broader community of nonprofit leaders and organizations.