This article was updated on May 26, 2020.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (HR 748) was signed into law on Friday, March 27, 2020, and includes both tax and nontax measures. An overview of the act’s key provisions for tax-exempt organizations follows.
Please read our additional alerts for overviews of the act’s implications for business and individual taxpayers.
Tax-Exempt Organizations Filing Form 990-T
Net Operating Losses
The act restores the five-year net operating loss (NOL) carryback for losses arising in any taxable year beginning after 2017, but before 2021.
This could be beneficial if your organization generated unrelated business taxable income (UBTI) in years preceding the year of generating an NOL. It could also be an opportunity to file a carryback claim for refunds. A taxpayer can also elect to forgo the carryback.
Special rules are provided for taxpayers that had a transition tax obligation under Section 965 in one of the carryback years.
Impact of Reporting Unrelated Activities
It’s not yet clear in the guidance if the tax reform law passed in 2017, commonly referred to as the Tax Cuts and Jobs Act (TCJA), of reporting unrelated activities separately could impact the carryback of certain activity losses to pretax reform years.
Carry-Forward Limit Suspension
Since the enactment of the TCJA, NOLs carried forward are limited to 80% of taxable income for the tax year. The CARES Act suspends this rule until the taxpayer’s first taxable year beginning after 2020.
This means 100% of UBTI for the tax year can be offset with an available NOL within the same unrelated activity.
Increased Limitation on Charitable Contributions for 2020
The act increases the limitation on a corporation’s deduction of charitable contributions from 10% of taxable income to 25% for 2020. The excess is carried over for five years. Eligible charitable contributions must be made in cash during 2020 and can’t be made to a Section 509(a)(3) supporting organization or donor-advised fund.
In addition, the limitation on donated food inventory during 2020 has increased from 15% of taxable income to 25%.
Employee Benefits and Employer Payroll Tax Relief
Payment of Employer Payroll Taxes Deferred
Employers can defer payment for the employer portion of payroll taxes incurred between the date the CARES Act is enacted through December 31, 2020.
If deferred, the employer would instead pay 50% of this amount by December 31, 2021, and the remaining 50% by December 31, 2022. The eligible payroll taxes are the employer’s portion of Social Security taxes—6.2% of an employee’s wages.
Employers that have indebtedness forgiven under Section 1106 of the act with respect to a loan under the Paycheck Protection Program—Section 1102 of the act—aren’t eligible.
Employee Retention Credit for Employers
Eligible employers may claim a credit against Social Security taxes, for each qualifying calendar quarter, equal to 50% of qualified wages, up to $10,000 of all quarters, per employee. If the credit for the quarter exceeds the employer’s Social Security tax liability, the excess is refunded.
Eligible employers operating a business during 2020 must have experienced either:
- A partial or full suspension of the operation of their trade or business during the calendar quarter due to governmental orders that limited commerce, travel, or group meetings due to COVID-19
- A significant decline in gross receipts from 2019
A significant decline is defined as beginning during the quarter in which the gross receipts for the quarter were less than 50% of those in the same quarter in the prior calendar year. The decline ends with the quarter in which gross receipts are greater than 80% of the gross receipts for the same quarter in the prior calendar year.
In the case of an organization which is described in Section 501(c) of the Internal Revenue Code and exempt from tax under Section 501(a), the significant decline beginning and ending periods above apply to all operations. All operations isn’t defined within the act, so further guidance will be needed.
Eligibility by Employee Population Size
For employers with under 100 employees, the credit applies to qualified wages paid to all employees. For employers with more than 100 employees, eligible wages are those paid to employees who aren’t providing services due to circumstances described above.
Exclusions
This credit doesn’t apply to governmental employers including:
- The US federal government
- State governments or their political subdivisions
- Any agency or instrumentality of any of the aforementioned
As a result, this excludes the following organizations from benefiting from the credit:
- State colleges and universities
- Public district hospitals
- Municipal utilities
- Federally chartered credit unions
Employers that take advantage of the payroll protection loan program—Section 1102 of the act—aren’t eligible. Also, qualified wages don’t include amounts paid for the sick leave credit or The Family and Medical Leave Act (FMLA) credit enacted by HR 6201.
Loans Available for Not-for-Profits
The CARES Act identifies a number of loan options available to not-for-profits.
Paycheck Protection Program
The following organizations are eligible for government-guaranteed loans administered by the Small Business Administration (SBA):
- Private colleges
- Section 501(c)(3) organizations exempt from tax under Section 501(a)
- Section 501(c)(19) veterans organizations
- Tribal businesses
In some cases, number of employees is limited to less than 500 employees to be eligible.
Student Workers as Employees
Under SBA regulations issued May 5, 2020, student workers generally don’t count toward an institution’s number of employees under the following circumstances:
- The applicant is an institution of higher education, as defined in the US Department of Education’s Federal Work-Study regulations.
- The student worker’s services are part of a Federal Work-Study Program—also defined in the Federal Work-Study regulations—or a substantially similar state or local work-study program.
Colleges and universities should exclude work-study students when determining employee count for PPP loan eligibility and should also exclude work-study payroll costs from the calculation of payroll costs used to figure the PPP loan amount.
Some schools that initially thought they were over the 500-employee threshold may now be eligible for a PPP loan after excluding their work-study employees.
Allowable Uses of SBA Loan Proceeds
SBA loans can be used for:
- Qualifying employee payroll costs
- Paid vacation, and parental, family, sick, or medical leave
- Insurance premiums
- Mortgage and other interest
- Rent
- Utility payments
Required Substantiation
Borrowing organizations will be required to make a good faith certification that:
- The loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
- Loan funds will be used to retain staff and maintain payroll, lease, and utility payments.
Organizations will also need to show they aren’t receiving duplicative funds for the same uses from another SBA program.
Loan Timeframe and Exclusions
The covered loan period is from February 15, 2020, through June 30, 2020. Organizations receiving these won’t be eligible to also receive the employer retention payroll tax credit mentioned above nor will they be able to defer payroll taxes if they have taken advantage of loan forgiveness under the paycheck protection program.
Loan Amounts and Interest Rates
The maximum loan amount will be $10 million through December 31, 2020. The act provides a formula by which the loan amount is tied to payroll costs incurred by the organization to determine the size of the loan. The maximum allowable interest rate on loans is 4%, and the maximum term is 10 years.
Loan Deferment and Forgiveness
Deferment of loan payments is allowed for at least six months, but not more than a year. The SBA is required to provide guidance to lenders on the deferment process within 30 days.
Borrowers may also be eligible for loan forgiveness for the first eight-week period after the origination date of the loan under certain circumstances.
Eligible payroll costs don’t include compensation above $100,000 in wages, compensation to employees whose principal place of residence is outside of the United States, or qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act.
Loan forgiveness under this program won’t be included in the borrower’s taxable income. For more information, see this guide on the US Senate Committee on Small Business & Entrepreneurship site and an article from the US Treasury.
Low Interest Loans for Mid-Size Organizations
Tax-exempt organizations with between 500 and 10,000 employees may have access to loans through the Federal Reserve. Interest rates for these loans won’t be higher than 2% per year and payments won’t be due for the first six months.
This is a largely undefined program to be created by the Treasury Department to fill the gap between the Paycheck Protection Program for smaller organizations and the industry stabilization loans to big businesses.
Eligible borrowers must self-certify that:
- The loan is necessary to support ongoing operations
- 90% of its workforce will be retained until September 30, 2020
- Jobs within the organization won’t be outsourced for two years following repayment of the loan
Economic Injury Disaster Relief Loan and Emergency Grants Program
Another program available for tax-exempt organizations is the Expanded Economic Injury Disaster Relief Loan (EIDL) and Emergency Grants Program or SBA 7(b) Loans. Please see our previous Alert for more information.
Student Loan Repayment Benefit
An employer may contribute up to $5,250 annually toward an employee’s student loans. These contributions would be excluded from the employee’s income.
The $5,250 cap applies to both:
- The new student loan repayment benefit
- Educational assistance such as tuition, fees, and books provided by the employer under current law
The provision applies to any student loan payments made by an employer on behalf of an employee after the date of enactment and before January 1, 2021.
Charitable Giving Incentives
Eligible individual taxpayers will be allowed an above-the-line deduction for taxable years beginning in 2020 in an amount not to exceed $300 of qualified charitable contributions made in cash during the taxable year.
This will allow individuals that elect not to itemize deductions to benefit from giving to qualified charitable organizations. Qualified charitable organizations don’t include organizations described in Section 509(a)(3) or the establishment of a new, or maintenance of an existing, donor-advised fund.
The act also lifts the existing cap on annual cash contributions during 2020 for those who do itemize, raising it from 60% of adjusted gross income to 100%.
Corporations are allowed a deduction up to 25% of taxable income versus the lower 10% of taxable income for cash contributions during 2020.
Additional Provisions
Other notable provisions in the act related to tax-exempt organizations allow for:
- Expanded unemployment benefits
- COVID-19 relief funds for certain distressed businesses including air carriers, tribal governments, state governments, and units of local governments
- Higher education funding and student aid support
We’re Here to Help
To learn more about how your organization can use the relief measures of the CARES Act, contact your Moss Adams professional.