Nonprofits and the CARES Act: A Closer Look
- The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), signed into law by President Donald Trump on March 27, 2020, provides $2.2 trillion of emergency appropriations in response to the COVID-19 pandemic.
- Although many provisions focus on the private sector industries, certain provisions are also applicable to nonprofit and tax-exempt organizations, including various loans as well as other items such as unemployment benefit reimbursements, an employee retention credit for the employer's share of employment taxes, a delay in the payment of payroll taxes and the increased ability for credit unions to provide credit to other nonprofit organizations.
President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) on March 27, 2020, providing $2.2 trillion of emergency appropriations in response to the COVID-19 pandemic. While many provisions focus on the private sector industries, certain provisions are also applicable to nonprofit and tax-exempt organizations.
This Holland & Knight alert is an overview of the CARES Act programs and the eligibility of nonprofit organizations for such business programs but does not cover those programs established specifically for the healthcare industry and educational institutions. A summary of the latter programs, as well as programs available to private sector industries, can be found on Holland & Knight's website.
Nonprofit and tax-exempt organizations also should refer to Holland & Knight's previous alert discussing qualified disaster relief payments and emergency hardship assistance, which not only may be provided to unrelated victims and others affected but also to the organization's own employees. (See "Charitable Giving Tips to Provide Help and Hope During the COVID-19 Crisis," March 26, 2020.)
Loans for Nonprofits
The CARES Act expands and provides funding for several U.S. Small Business Administration (SBA) programs that primarily are intended for "small business concerns." A small business concern for SBA purposes generally only includes for-profit entities that are independently owned and operated, unless specific provisions are carved out for nonprofits. However, some programs in the new CARES Act permit certain nonprofit organizations to participate.
Paycheck Protection Program
The new Paycheck Protection Program permits loans directly to 1) any "nonprofit organization" which is defined to mean only tax-exempt organizations described in Internal Revenue Code (IRC) Section 501(c)(3), i.e., charities, and 2) tax-exempt veterans organizations described in IRC Section 501(c)(19). Thus, charities and veterans organizations are eligible for loans during the covered period of Feb. 15, 2020 through June 30, 2020, as long as the organization does not have more than 500 employees and was operational as of March 1, 2020. The CARES Act makes charities and veterans organizations subject to the SBA's "affiliation" rules in determining size, meaning that the organization must take into account the number of its own employees as well as any related organizations, whether nonprofit or for-profit. These affiliation rules and regulations are far-reaching and complex, and careful analysis of them is required.
Charities and veterans organizations can use the loan proceeds for certain payroll costs, rent, utilities, mortgage interest, and interest on other debt obligations incurred before Feb. 15, 2020. In addition, these organizations are eligible to have such loans forgiven, effectively turning the loans into grants, if additional requirements are met.
For-profit businesses owned by any nonprofit organization (not just charities and veterans organizations) are also eligible for loans under the new Paycheck Protection Program, as long as they meet the other SBA eligibility requirements. For example, as noted above, for a for-profit entity to be considered "small," it must include all its affiliates, including its nonprofit parent in the size calculation.
Assistance for Mid-Size Nonprofits
The CARES Act provides funding and liquidity in the Federal Reserve System for a new program to provide financing to banks and other lenders that make loans – with no higher than 2 percent interest and no principal or interest payments due for the first six months – directly to nonprofit organizations. To be eligible, a nonprofit organization must have between 500 and 10,000 employees and must be a U.S. entity with significant operations in the U.S. and a majority of its employees located in the U.S. A nonprofit organization seeking such a loan must certify that it will use the funds to retain at least 90 percent of its workforce at full compensation and benefits until Sept. 30, 2020, and that, within four months of the end of the COVID-19 emergency, it intends to restore at least 90 percent of the workforce that it had as of Feb. 1, 2020. In addition, the nonprofit must agree to certain limitations on compensation paid to highly compensated employees.
Disaster Assistance Loans for Nonprofits of Any Size
Under the SBA's existing 7(b)(2) program, most nonprofit organizations of any size were already eligible for a disaster assistance loan of up to $25,000 unsecured or up to $2 million with collateral at 2.75 percent interest. Nonprofit organizations owned by a government entity are not eligible for SBA disaster loans. To be eligible for disaster assistance under the existing 7(b)(2) program, a nonprofit had to be located in an area affected by a disaster or emergency, and the nonprofit had to suffer a substantial economic injury as the result of such disaster. The CARES Act expressly includes the COVID-19 pandemic as an applicable disaster. A substantial economic injury is an injury that results in the inability of the nonprofit to meet its obligations as they mature; to pay its ordinary and necessary operating expenses; or to market, produce, or provide a product or service ordinarily marketed, produced or provided by the nonprofit.
The CARES Act adds that, for a "small" nonprofit that applies for a disaster loan, the SBA may provide an advance on such loan in amount of up to $10,000 within three days of application for the loan. A nonprofit must be "small" under the SBA's standards, according to the number of employees it has or its annual receipts. To receive an advance, a nonprofit must certify under penalties of perjury that it meets the requirements for being eligible. The nonprofit would not be required to repay such advance, even if subsequently denied the loan.
Other Provisions Applicable to Nonprofits
All 501(c)(3) organizations have the option of paying unemployment insurance tax or self-insuring. If a charity self-insures, it is required to repay its state unemployment insurance trust fund for the amount of unemployment benefits actually claimed by the charity's laid-off employees. The CARES Act reimburses these charities for half of their costs of unemployment benefits provided to laid-off employees. On the other hand, for those charities that are exempt from unemployment laws, such as churches, affiliated religious organizations, religious schools and charities with fewer than four employees, the employees of such charities are not eligible for receiving unemployment benefits; thus, these charities would not receive any reimbursement unless they voluntarily elect to self-insure.
Employee Retention Credit for Employer's Share of Employment Taxes
The CARES Act allows employers to claim a new credit against applicable employment taxes in an amount equal to 50 percent of the qualified wages paid after March 12, 2020, and before Jan. 1, 2021, with respect to certain employees, up to a maximum of $10,000 of wages per employee. For employers with more than 100 full-time equivalent (FTE) employees, this provision includes those employees who were not working due to COVID-19. For employers with 100 or fewer FTE, it includes all employees. Such credit is valid for any calendar quarter in which the employer's operations were suspended due to governmental orders limiting commerce, travel or group meetings due to COVID-19, or in which the employer had a significant decline in gross receipts as compared to the prior year's corresponding quarter. Any excess credit is treated as a refundable overpayment. For this credit, any employer that is a tax-exempt organization described in IRC Section 501(c), which covers everything from charities to business leagues to social clubs to credit unions (and more), is deemed to be an eligible employer with respect to all of its operations (notwithstanding that such operations may not be a trade or business); however, if the employer receives a loan under the Paycheck Protection Program (discussed above), then the employer is not eligible for this credit.
Delay of Payment of Payroll Taxes
The CARES Act permits payment of the employer's share of payroll taxes from March 27, 2020, through the end of 2020 to be delayed, with half of such amount due Dec. 31, 2021, and the other half due Dec. 31, 2022. This ability to delay payment applies to any employer, including all nonprofit organizations, but does not apply if an organization obtained a loan and has such loan forgiven under the Paycheck Protection Program.
The CARES Act increases the ability of credit unions to provide credit to other nonprofit organizations. These provisions temporarily relax the requirement that a credit union primarily serve natural persons and expand the ability of a credit union to obtain additional liquidity from the National Credit Union Central Liquidity Facility. These provisions sunset at the end of 2020.
How Holland & Knight Can Help
Holland & Knight's Nonprofit and Tax-Exempt Organizations Team has assisted various types of nonprofit and tax-exempt organizations in transactions that involve financing, employment law, best practices and sustainable operations. For more information about pursuing one of these new programs or any questions about how the CARES Act may impact your nonprofit organization, contact the authors or another team member, who can coordinate as needed with Holland & Knight's Financial Services Team, Government Contracts Group, and Labor, Employment and Benefits Group.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.