COVID-19 Relief and Tax Benefits for Non-Profit Organizations

Practice Areas

By Asha Inamdar

The Coronavirus Aid, Relief, and Economic Security (CARES) Act) was introduced on March 27, 2020 by the Trump government which initiated a lot of funding for businesses, including tax-exempt organizations. Some of the prominent relief measures are:

Financial Assistance

The aid depends on the Non-Profit Organization’s tax classification U/S 501(a) of the Internal Revenue Code.

Paycheck Protection Program (PPP)

  • For organizations classified as 501(c)(3) and 501(c)(19) (veteran organizations): Less than or equal to 500 employees, including full-time and part-time employees as of March 1, 2020
  • Loan amount of 2.5 times the average total monthly payroll costs for the last 12 months, capped at $10 million
  • No yearly or guarantee fees by the SBA, no prepayment penalties
  • No personal guarantee or pledge of collateral or no need to demonstrate that credit cannot be obtained elsewhere
  • Need to certify:
    • There’s no double-dipping of funds
    • Loan necessary to meet hardships due to COVID-19 related to uncertain economic conditions
    • Funds to be utilized for payment of payroll costs, rent, mortgage or utilities; or to retain employees
  • Funds cannot be utilized to pay independent contractos
  • Compensation per employee capped at $100,000
  • Loan forgiveness of up to 8 weeks of above eligible costs starting from date the loan is granted, as long as employees are not laid off, or are rehired after lay-off.
  • Loan balance remaining after loan forgiveness amount can be repaid in 10 years.

Economic Injury Disaster Loan (EIDL)

For other Non-Profit Organizations such as 501(c)(4) and 501(c)(6) with less than 500 employees as of March 1, 2020:

  • Emergency EIDL grants have been extended through December 31, 2020 along with a $10,000 EIDL advance for those who have applied to the EIDL.
  • The $10,000 will not have to be repaid, irrespective of whether the EIDL has been granted or not.

Stabilization Fund

Larger entities having employees greater than 500 but less than 10,000 employees:

  • Financial aid under a new Stabilization Fund
  • No loan forgiveness
  • Interest rate of maximum 2% with no interest or principal due up to the first 6 months
  • Certification needed for:
    • 90% of the employees who would be retained or rehired at their full compensation level and benefits until September 30, 2020,
    • jobs would not be outsourced to individuals outside of the organization for 2 years following the loan repayment; and
    • funds are needed to support ongoing business operations

Deferral of employer payroll taxes (social security and medicare) for 2020

  • 50 % can be deferred until December 31, 2021, with the balance 50% to be paid by December 31, 2022
  • A refundable payroll tax credit of up to $5,000 per employee
  • Can be availed as long as benefit under PPP Loan is not claimed

Employee retention credit for employers facing closures due to covid-19

  • An eligible exempt organization can claim the credit for any closed operations, even if the activities are unrelated trade or business.
  • A credit of 50% of qualified wages can be claimed against Social Security Taxes, for each qualifying calendar quarter, subject to a maximum of $10,000 per employee. Any credit exceeding the liability for Social Security taxes for the quarter is refunded
  • The employer suffered a partial or full suspension of business operations during the calendar year affected by the orders of the government.
  • A decline in a period beginning with a quarter of more than 50% compared to the same quarter of the previous year; and ending in a quarter with gross receipts exceeding 80% of the gross receipts for the same quarter for the previous calendar year.
  • Credit can be availed as long as benefit under PPP Loan is not claimed.

Other benefits to employers who are tax-exempt organizations

  • Early withdrawal penalties have been waived for certain qualified retirement plans if withdrawn for COVID-19 related difficulties
  • Minimum distribution rules for certain retirement benefit plans have been waived momentarily
  • Paid sick-leave related payroll tax credit guidelines have been modified under the Phase-2 COVID-19 legislation

Tax benefits

  • Net Operating Losses (NOL) can now be carried back up to 5 years for losses arising on or after 2017 taxable years, however, before 2021. Especially beneficial in case of Unrelated Business Taxable Income (UBTI).
  • Taxpayer can elect to forego the carryback
  • Excess business loss limitations for losses in excess of $250,000 have been deferred for tax years beginning after December 31, 2020. Tax-exempt trusts can now claim these losses on their 2019 tax returns, or even amend their 2018 tax returns and be entitled to refunds
  • AMT credit refundability momentarily accelerated for corporations, allowing them to claim it fully in the taxable years beginning in 2018 or 2019.
  • Business interest U/S 163(j) limitation has been relaxed for tax years beginning 2019 and 2020 temporarily to 50% of the adjusted taxable income, and businesses could elect to use the 2019 adjusted taxable income for tax years beginning in 2020
  • A new ‘above-the-line’ deduction of up to $300 can be claimed by individuals for charitable contributions who do not itemize deductions on their tax returns. Whereas those who itemize may claim a deduction of up to 100% of their Adjusted Gross Income (AGI) for charitable contributions made. Either of these two can be claimed as long as the charitable contribution is made in cash in the year 2020 to a charity other than a Section 509(a)(3) supporting organization or donor-advised fund.
  • Charitable contributions for 2020 by a corporation can now be made up to 25% of the taxable income as opposed to 10% and the excess can be carried over 5 years.
  • Food inventory donations can now be made up to 25% in 2020, v/s 15%.

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