Private Foundation Spring 2020 Tax Update: New Regulations, Relief Initiatives, and More

The financial and operational strains introduced by COVID-19 are affecting everyone—including private foundations. However, related legislation, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, aims to provide organizations and their employees with relief and assistance. Private foundations can benefit from many of these provisions.

Additionally, key tax changes passed in December 2019 and the first quarter of 2020 will significantly affect private foundations. Below, we review these changes and COVID-19 relief efforts available to private foundations.

Lending Options

The CARES Act provides lending options for businesses, including private foundations.

Paycheck Protection Program

For small businesses, the Small Business Administration’s (SBA) 7(a) Loan, also known as the Paycheck Protection Program (PPP), was expanded.

For purpose of the PPP, a small business is an organization that either:

  • Has 500 or fewer employees
  • Meets the SBA employee-based size standards for the industry in which it operates

PPP loans can be forgiven if the funds are used to cover qualified payroll costs and other permitted uses. Loan forgiveness will be partially reduced if there’s a reduction in employees or a reduction of more than 25% of employee compensation.

For more information about this program and potential benefits, see our previous Alert.

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. EIDLs are available to the following organizations in all US states and territories:

  • Small businesses
  • Small agricultural cooperatives
  • Most private not-for-profit organizations

Approximately 99% of the organizations listed above should qualify. Learn about potential benefits and qualifying organizations in our previous Alert.

Employer Payroll Tax Relief

Payment of Employer Payroll Taxes Deferred

Employers can defer payment for the employer portion of payroll taxes incurred between March 27, 2020—the date the CARES Act was enacted—through December 31, 2020.

If an employer defers these taxes, they must pay 50% of the owed amount by December 31, 2021, and the remaining 50% by December 31, 2022. The employer’s portion of employees’ Social Security taxes—6.2% of an employee’s wages—qualify for this treatment.

Employers who have indebtedness forgiven under Section 1106 of the CARES Act with respect to a loan under the PPP—Section 1102 of the act—may defer payment until the loan is forgiven. Taxes that are deferred until the loan forgiveness are paid per the same schedule mentioned above. 

Employee Retention Credit for Employers

Eligible employers may claim a credit against Social Security taxes for each qualifying calendar quarter. The credit is equal to 50% of qualified wages, up to $10,000 for each quarter, per employee. If the credit for the quarter exceeds the employer’s Social Security tax liability, the excess is refunded.

Qualifications

Eligible employers operating a business during 2020 must have experienced either of the following to qualify:

  • A partial or full suspension of their trade or business’ operations 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 a decline in which the gross receipts for a quarter were less than 50% of those from the same quarter of 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. 

Private Foundations

For private foundations, the beginning and ending periods of a significant decline apply to all operations. All operations isn’t defined in the CARES Act, so further guidance will be needed.

Employers

For employers, the following stipulations apply:

  • Employers with up to 100 employees. The credit applies to qualified wages paid to all employees.
  • Employers with more than 100 employees. The credit applies to qualified wages paid to employees who aren’t providing services due to governmental orders that limit commerce, travel, or group meetings in response to COVID-19. It also applies if an employer has had a significant decline in gross receipts.

Employers who benefit from the PPP aren’t eligible for the credit. 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.

CARES Act Effects on Form 990-T

There are several provisions of the CARES Act that affect organizations that file Form 990-T due to unrelated business income.

Net Operating Loss Carrybacks

The CARES Act restores the five-year net operating loss (NOL) carryback for losses arising in any taxable year beginning after 2017, but before 2021. Taxpayers may elect to forgo the carryback.

The CARES Act also restores an organization’s ability to offset income with 100% of NOLs carried forward rather than 80%—the amount previously enacted in the 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA).

Beginning in 2021, an organization can offset income with 100% of NOLs carried forward until the organization’s first taxable year. It isn’t yet clear if the TCJA’s requirement of separately reporting unrelated activities could impact the carryback of certain activity losses to years before the TCJA was enacted.

The CARES Act also 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.

Emergency Leaves and Tax Credits

On March 18, 2020, President Trump signed into law HR 6201, known as the Families First Coronavirus Response Act (FFCRA). The FFCRA includes a mandate that certain employers provide paid sick and family leave. The effective dates of the new law are April 1, 2020, to December 31, 2020. For more information about these new leaves provisions, see our previous Alert.

To help employers who are subject to the mandated leave provisions, the FFCRA allows these impacted employers to take a tax credit against the following:

  • Payroll taxes for the qualified sick leave
  • Family and medical leave wages paid each quarter  

Employers can get reimbursed for up to 10 days of paid sick leave and up to 50 days of paid family leave provided to each employee, with some limitations, which are noted below.

Paid Sick Leave Credit

The paid sick leave credit applies to employees impacted by COVID-19, including employees who take leave to:

  • Self-quarantine due to their own illness, a governmental quarantine, or isolation order
  • Self-quarantine because they’re experiencing symptoms and seeking a medical diagnosis
  • Care for an individual in quarantine or isolation
  • Care for a child because school or other care is closed

The paid sick leave credit is 100% or two-thirds of an employee’s regular rate of pay, depending on the reason for the leave. The credit is limited to the following wage limits:

  • When an employee takes leave for their own illness or quarantine, the limit is $511 per day, for a total of $5,110 for the entire 10-day leave period.
  • When leave is taken to care for another individual or child, the limit is $200 per day, for a total of $2,000 for the entire 10-day leave period.

Paid Family and Medical Leave Credit

In addition to the paid sick leave credit, eligible employers can receive a paid family and medical leave credit on wages paid to employees caring for a child due to a closed school or unavailable child care as a result of COVID-19 precautions.

The credit is two-thirds of an employee’s regular rate of pay, limited to $200 per day for a total of $10,000. 

Disaster Relief Payments

On March 13, 2020, President Trump declared a national emergency in connection with COVID-19. Under Internal Revenue Code (IRC) Section 139, private foundations may provide assistance following the declaration of national emergency without the risk of incurring certain tax liability.

A foundation can make financial assistance payments to employees and their families as long as certain safeguards are in place. For more information about these relief payments, read our previous Alert.

Additional Tax Legislation for Private Foundations

Reduced Tax Rate

Excise-tiered tax structures for private foundations were simplified by the Further Consolidated Appropriations Act, 2020. Since 1969, private foundations have been subject to either 1% or 2% tax rate on net investment income, depending on their charitable expenditures. The Further Consolidated Appropriations Act, 2020, eliminates this dual regime and changes the excise tax on net investment income for private foundations to a single rate of 1.39%.

Private foundations can now plan for a flat tax rate on net investment income excise tax for tax years beginning after December 20, 2019. While this change means a private foundation can no longer qualify for a reduced 1% net investment income tax, it also streamlines the tax and allows private foundations to increase distributions in time of need without a penalty.

Parking Tax Repeal

As part of the 2020 government funding package, the Further Consolidated Appropriations Act, 2020, Congress repealed IRC Section 512(a)(7), commonly referred to as the parking tax.

IRC Section 512(a)(7) was originally added to the tax code under the TCJA. The provision treated amounts a private foundation paid or incurred after 2017 to provide its employees with certain transportation fringe benefits as unrelated business taxable income (UBTI).

Because the repeal of this provision is retroactive to the date of its enactment, the repeal applies to any tax liability incurred since enactment. Private foundations that paid tax under this provision in a prior year should be eligible for a refund.

We’re Here to Help

To learn more about relief measures and other COIVD-19 resources your organization can utilize, contact your Moss Adams professional.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: