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March 27, 2020

Analysis of CARES Act for Non-Profit Organizations

Coronavirus: Tax-Exempt Organizations Advisory

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Introduction

On March 27, President Trump signed into law a $2.2 trillion stimulus plan—the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)—in response to the coronavirus pandemic. The CARES Act, previously passed by the Senate in a 96-0 vote, is a mix of direct cash payments to many Americans, financial support for small businesses and targeted sectors of the economy, and more resources for frontline medical support.

The legislation includes a number of provisions of relevance to non-profit organizations, including: (1) expanded eligibility for non-profits to apply for Small Business Administration (SBA) loans; (2) opportunities for larger non-profits to apply for relief under a new program at the Department of Treasury; (3) expanded unemployment benefits to employees who lose their jobs due to COVID-19; and (4) tax incentives for employers to retain employees during the pandemic. This analysis provides an in-depth summary of the provisions of interest to non-profits, as well as several considerations for your organization in response to the COVID-19 pandemic.

NON-PROFIT ELIGIBILITY FOR SMALL BUSINESS LOANS AND GRANTS

Paycheck Protection Program. The CARES Act provides $349 billion for the new "Paycheck Protection Program" (PPP).

The PPP is available to any business that has already qualified as a "small business concern," as well as businesses, 501(c)(3) charities, 501(c)(19) veterans organizations, and tribal business concerns that employ not more than either: 500 employees; the size standard established by the SBA for their industry; or a business that has more than one physical location (with 500 or fewer employees per location) and is assigned a North American Industry Classification System (NAICS) code beginning with 72. (Sole proprietors, independent contractors, and self-employed individuals are eligible for PPP loans, as well.)

It is critical to note that the PPP is open only to non-profit organizations tax-exempt under Section 501(c)(3) or veterans organization tax-exempt under Section 501(c)(19) of the US Internal Revenue Code. All other non-profit organizations are ineligible to participate.

The Act seeks to streamline processing by delegating authority to make and approve loans to qualified lenders (thus eliminating the need to go through SBA), waiving fees for both borrowers and lenders, and limiting a lender's consideration only to whether the borrower was in operation on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors. Current 7(a) lenders can provide PPP loans but will need to opt into the program. The Treasury Department, in consultation with other financial regulatory agencies, will establish criteria for allowing other lenders to participate in PPP within 15 days of enactment.

Amount and use of loan. Through the PPP, small businesses and other eligible entities such as 501(c)(3) and 501(c)(19) organizations can receive a loan of up to $10 million with loan repayments deferred for up to a year. Importantly, the SBA will grant forgiveness up to an amount equal to eight weeks of payroll and other certain costs if the borrower retains its employees and maintains salary levels. All loan fees are waived for borrowers and lenders. Unlike traditional 7(a) loans, an applicant does not need to demonstrate that it is unable to obtain credit elsewhere, nor does it have to provide a personal guarantee or provide collateral, to receive a PPP loan.

The maximum loan amount for each borrower is $10 million, and the Act provides a formula by which the loan amount is tied to payroll costs incurred by the business. Loan proceeds may be used for: (1) payroll costs; (2) employee salaries; (3) interest payments on mortgages entered into before February 15, 2020 (but not prepayment or payment of principal); (4) rent for a lease entered into before February 15, 2020; (5) utilities, including electricity, gas, water, transportation, telephone, or internet; and (6) interest on any debt incurred before February 15, 2020. Loans would be backed by a 100 percent federal guarantee through December 31, 2020, at which time the guarantee percentage would revert to the standard Section 7(a) loan guarantee.

PPP loan payment deferment and forgiveness.The Act provides that PPP loans will be eligible for payment deferment for at least 6 months and no more than one year, as well as forgiveness for the total amount borrowers spent on payroll costs and mortgage interest, rent, and utility payments between February 15 and June 30, 2020. Any canceled indebtedness will not be included in the borrower's taxable income. However, a borrower whose PPP loan is forgiven is not eligible for deferral of the payroll tax (detailed below in the "Tax Provisions" section).

There are a few restrictions on the amount of loan forgiveness an eligible entity can receive. First, the forgiven amount cannot exceed the loan principal. Second, the amount forgiven will be reduced proportionally by any reduction in employees compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their compensation the prior year. To encourage employers to rehire employees who may already have been laid off due to COVID-19, the CARES Act provides an exception to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020.

Impact on other relief provided by stimulus package. By participating in the PPP, however, otherwise eligible entities may become ineligible for other relief provided in the Act. For example, an employer who receives a PPP loan is ineligible for the employee retention credit (detailed below in the "Tax Provisions" section). In addition, as explained below, there are consequences for having the PPP loan forgiven. However, the CARES Act does allow an eligible entity to receive both a PPP loan and an economic injury disaster loan (EIDL) from the SBA under certain circumstances, such as if the EIDL is made before the PPP loans are available and for a purpose other than covering payroll costs.

Emergency Economic Injury Disaster Grants. The package includes $10 billion for SBA to provide emergency EIDL grants until December 31, 2020.

Eligibility for non-profits. All "private non-profit organizations" are eligible for purposes of the EIDL program, including any entity exempt under section 501(c), including trade associations, advocacy organizations, unions and social clubs otherwise excluded under the Payroll Protection Program, in addition to certain organizations tax-exempt under 501(d) (apostolic organizations) or 501(e) (cooperative hospital service organizations).

For EIDLs made before December 31, 2020 due to COVID-19, the SBA will waive the requirement for a personal guarantee on advances and EIDLs below $200,000, the requirement that an applicant needs to have been in business for the one-year period before the disaster, and the requirement that a business not have credit available elsewhere. In addition, the Act establishes that a federally declared emergency qualifies as a new trigger for the EIDL program, thus making EIDLs available nationwide.

Amount and use of EIDL grants. The emergency EIDL grant is an advance of $10,000 to small businesses and non-profits that apply for SBA's EIDL program. The advance will be provided within three days of applying for the loan, and organizations will not be required to repay the advance, even if they are denied for an EIDL.

Generally, EIDLs provide up to $2 million for working capital and have a 3.75 percent interest rate for small businesses and a 2.75 percent rate for non-profits. Under current law, EIDLs are available to small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, non-profit organizations. The CARES Act expands eligibility for EIDL to include tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor between January 31, 2020 and December 31, 2020. Private non-profits are also eligible for both grants and EIDLs. Until December 31, 2020, the SBA can approve EIDLs based solely on an applicant's credit score or an alternative appropriate method for determining an applicant's ability to repay.

Considerations for Non-Profit Organizations. As detailed above, the PPP program is limited in scope to 501(c)(3) and 501(c)(19) non-profit organizations, while all non-profit organizations are eligible for emergency EIDL grants. Questions remain about how these programs will work in practice, which A&P will be monitoring closely. The CARES Act requires the SBA to issue regulations under the title within 15 days of enactment, under emergency rulemaking authority. While the Act provides deadlines for the SBA and Treasury Department, the agencies could face delays in issuing regulations and guidance to implement the PPP and emergency EIDL grants fully, among the other new initiatives in the Act. Our team is in the process of putting together an advisory on Frequently Asked Questions about these programs to provide additional clarity about how non-profits can take advantage of these funds.

ASSISTANCE THROUGH THE DEPARTMENT OF TREASURY

Exchange Stabilization Fund. The CARES Act provides $500 billion to the Department of Treasury for an Exchange Stabilization Fund that will provide loans, loan guarantees, and other investments to industries affected by the coronavirus. Of the fund, $46 billion will be used for passenger air carriers, cargo air carriers, and businesses important for maintaining national security. The other $454 billion will be available as loans, loan guarantees, and investments for eligible businesses, states, and municipalities.

Within the $454 billion, the final Act emphasizes that the Secretary should "endeavor to" make loans and investments available - to the extent practicable - to mid-size businesses and non-profit organizations between 500 and 10,000 employees. The loans made to these entities should be at a rate not higher than 2 percent annualized, and with no principal or interest payable for the first six months of the life of the loan. Entities wishing to take of advantage of this program must make a good-faith certification that: (1) economic uncertainty requires those terms; (2) funds received will be used to retain 90 percent of the workforce at full compensation and benefit levels before Sept. 30, 2020; and (3) an intent to restore not less than 90 percent of the workforce prior to Feb. 1, 2020 while restoring all compensation and benefit levels to workers no later than 4 months after their termination date.

These entities must also certify that they will not outsource or offshore jobs for the term of the loan or 2 years after completing repayment of the loan. They also must certify that they will not abrogate collective bargaining rights during this time and will remain neutral in a union organizing effort for the term of the loan.

Considerations for Non-Profit Organizations. The final language in this section refers generally to non-profit organizations, so it appears that these funds will be available to all non-profits, unlike the Paycheck Protection Program that is limited to 501(c)(3)s. The Act directs the Department of Treasury to issue additional regulations and guidance on how this fund will work. There will be significant demand for these funds, including from a wide range of businesses that will be seeking economic relief.

We expect members of Congress will work with constituent companies and organizations to weigh in with the Department of Treasury to help businesses and non-profits in their district or state receive relief from economic damages caused by the coronavirus. We strongly recommend non-profit organizations apply for funds as soon as they are available and consider engaging with members of Congress to advocate for funding for your organization.

EMPLOYMENT PROVISIONS

Unemployment Benefits. The Act creates a temporary "Pandemic Unemployment Assistance" program to provide expanded unemployment benefits without a waiting period to workers who are unemployed, partially unemployed, or temporarily unable to work as a result of the coronavirus pandemic between January 27, 2020 and December 31, 2020. The Act includes a specific section related to non-profit organizations, which allows these organizations to be reimbursed for half of the costs incurred through the end of 2020 to pay unemployment benefits.

The Act also provides an additional $600 per week payment to those receiving unemployment benefits under their respective state laws and Pandemic Unemployment Assistance participants for up to four months. In addition, the Act provides federal funding for thirteen weeks of additional unemployment benefits through the end of 2020.

Short-Time Compensation.The Act provides federal funding for State short-time compensation programs through the end of 2020. These benefits are available to employees who are receiving compensation through a State program because their hours have been reduced to avoid a lay-off (also sometimes referred to as "work share" programs). However, benefits are not available to seasonal, temporary, or intermittent workers. Employers are required to pay to the State one-half of the amount of short-time compensation paid under the State short-term compensation program through the end of 2020.

Considerations for Non-Profit Organizations. Non-profit organizations are faced with a number of challenging decisions in response to this crisis, including weighing whether to continue to pay workers or make the difficult decision to lay off employees. Congress enacted these benefits to support employees who lose their jobs due to the pandemic, which will be critical in the coming days as a record number of Americans filed for unemployment benefits in the last week alone.

TAX PROVISIONS

Employee Retention Credit for Employers. Non-profits organized under 501(c) are eligible for the new partially refundable employee retention credit authorized by the legislation. The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. 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 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. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Expanded Charitable Deductions. The Act provides individuals with a $300 deduction for donations to charitable organizations available regardless of if taxpayer itemizes their deductions. The Act also suspends recent limitations on charitable donations by individuals, such as the 60 percent adjusted gross income limitation, and by corporations, by increasing the limitation from 10 percent to 25 percent of taxable income.

Delay of Certain Payroll Tax Payments. Under the proposal, employers, including tax exempt organizations, and self-employed individuals may 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. 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.

Minimum Funding Rules for Certain Charities. The CARES Act modifies the minimum funding rules for pension plans sponsored by charitable organizations whose primary purpose is to provide medical care and assistance to mothers and children to allow for more flexibility in the amount of required payments.

Considerations for Non-Profit Organizations. All 501(c) organizations are eligible to take advantage of the Employee Retention Tax Credit, but as noted above, any 501(c)(3)s receiving a loan under the Paycheck Protection Program detailed above are ineligible for this tax credit. Members of Congress will likely work with constituent organizations and relevant trade associations to help non-profits clarify any ambiguities in the tax provisions with Treasury and the IRS. We strongly recommend non-profit organizations engage with the administration and with relevant members of Congress as soon as possible after identifying tax-related challenges with the legislation in order to be considered for any technical corrections or revisions in subsequent legislative packages.

*Jamie Lee contributed to this Advisory. Ms. Lee is a graduate of the University of Chicago Law School and is employed at Arnold & Porter's Washington, DC. office. Ms. Lee is not admitted to the practice of law in Washington, DC.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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