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March 30, 2020

Stroock Special Bulletin

By: Alan M. Klinger, David W. Lowden, Kerry T. Cooperman,

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Act”), signed into law by President Trump on March 27, 2020, includes among its approximately $2.2 trillion in economic stimulus programs a series of measures designed to provide economic support to eligible nonprofit organizations.  These measures include, among others, broad eligibility for low-interest federal loans and loan forgiveness, tax incentives for individual and corporate contributions to nonprofits, and reimbursement of and credits for certain operating expenses of nonprofits.

Key benefits for eligible nonprofits under the CARES Act include the following:

Eligibility for Emergency SBA Loans for Small/Midsize Charitable Nonprofits (500 or Fewer Employees): Under the CARES Act’s Paycheck Protection Program, nonprofit organizations that (i) are organized under Section 501(c)(3) of the Internal Revenue Code (the “Code”), (ii) were in operation (and paying employees or independent contractors) as of February 15, 2020, and (iii) have 500 or fewer employees (including full-time, part-time, and certain other employees) are eligible for emergency Small Business Association (“SBA”) loans up to the lesser of $10 million or two-and-a-half times the average total monthly payroll costs from the prior year (subject to a $100,000 annual per-employee cap).[1] The interest rate will not exceed 4%, and the repayment of principal, interest and fees is deferred for at least six months and up to one year.  Eligible applicants need not pledge collateral or provide a personal guarantee.  But they must self-certify that (i) the requested loan is necessary due to current conditions; (ii) the loan will be used for permissible enumerated purposes; and (iii) the applicant is not receiving duplicative funds for the same uses from another source.  The loans may be used for payroll (including paid leave), health-insurance premiums, retirement benefits, mortgage, rent, utility costs and interest on other debt obligations, among other enumerated expenses.[2]

Subject to certain limitations, a Paycheck Protection Program loan is eligible for forgiveness — effectively converting it into a grant — to the extent it is used for payroll expenses (not to exceed $100,000 of annualized compensation per employee) or rent, utility or mortgage interest payments during the eight-week period following origination of the loan.  Additional compensation paid to tipped workers is also eligible for loan forgiveness.  The amount of loan forgiveness is subject to reduction to the extent the borrowing nonprofit has laid off employees, or reduced the compensation of employees by enumerated amounts, on or after February 15, 2020.  But a nonprofit is eligible for relief from certain loan-forgiveness-reduction penalties if it rehires the laid off employees, or restores their compensation to required levels, by June 30, 2020.  Specifically, among other relief, a nonprofit that reduced its workforce or salaries between February 15, 2020, and April 26, 2020, will not be subject to any penalty with respect to loan forgiveness if such reductions are eliminated by June 30, 2020.[3]

Eligibility for Federal Loans for Larger Nonprofits (500-10,000 Employees): Nonprofit organizations with between 500 and 10,000 employees will be eligible for available federal loans at rates not exceeding 2% per year (with no payments due or accrual of interest for the first six months). Such nonprofits must certify that, among other things, (i) the loan is necessary to support the nonprofit’s ongoing operations, and (ii) the nonprofit will use the funds to retain at least 90% of its workforce at full compensation and benefits until at least September 30, 2020, and will not outsource or offshore jobs for a specified time period.  Loan forgiveness is not available under this program.[4]

Eligibility for SBA Economic Injury Disaster Loans (“EIDL”) for All Nonprofits: Under the SBA’s EIDL program, as expanded and modified by the CARES Act, private nonprofit organizations of all sizes that were in existence as of January 31, 2020 — including 501(c)(4) social welfare organizations and 501(c)(6) trade associations (among other nonprofits, such as 501(c)(3) charities) — are also eligible for emergency loans of up to $2 million at a 2.75% interest rate. Subject to certain limitations, nonprofits applying for loans under this program need not provide personal guarantees or proof that they can obtain credit elsewhere.  The EIDL loans may be used for payroll, accounts payable and other debts that otherwise cannot be paid due to the impact of COVID-19.  Eligible nonprofits can receive checks for up to $10,000 within three days of applying for the loan — and need not repay the $10,000 if the application is later denied.[5]

Expansion of Tax Deductions for Charitable Contributions: The CARES Act also (i) authorizes individuals who elect to take the standard deduction to further deduct up to $300 for cash contributions to certain qualifying charities for the 2020 tax year;[6] (ii) raises the cap on the deductibility of annual charitable giving by individuals who itemize their taxes to 100% of adjusted gross income, subject to certain limitations; and (iii) raises the cap on the deductibility of annual charitable giving by corporations from 10% to 25% of taxable income (and raises the cap on deductibility of food donations by corporations from 15% to 25% of taxable income).[7]

Employee Retention Payroll Tax Credit: Nonprofit organizations that (i) were an ongoing concern at the beginning of 2020, (ii) either experienced a reduction in revenue of at least 50% in the first quarter of 2020 compared with the first quarter of 2019 or had their operations suspended (in whole or in part) during the calendar quarter due to governmental orders restricting commerce or travel due to COVID-19, and (iii) are not receiving loans under the SBA’s Paycheck Protection Program (described above), are eligible for a refundable payroll tax credit of up to $5,000 for each employee on the payroll. In calculating the decline in revenue for this purpose, the nonprofit’s whole operations must be taken into account.  This tax credit is available on an ongoing basis until the nonprofit’s revenue for a quarter exceeds 80% of its revenue from the same quarter in the previous year.[8]

Reimbursement of Self-Funded Unemployment Benefit Payments: Nonprofit organizations that self-fund unemployment benefits are eligible for reimbursement of up to one-half the cost of benefits provided to employees who were laid off.[9]

While there are not yet clear guidelines for the administration of many of the above-referenced programs and benefits, we expect the SBA to roll out regulations for the administration of its loans programs under the CARES Act, including where and how to apply for loans, in the coming weeks.  (The CARES Act directs the SBA to issue regulations within 15 days of enactment of the Act.)  Nonprofit organizations that may be eligible for relief under the Act are therefore encouraged to stay closely abreast of regulatory and legislative developments.

______________________________

For More Information:

Alan M. Klinger

David W. Lowden

Kerry T. Cooperman

Lee C. Rarrick

[1]  See CARES Act Tit. I § 1102 (Paycheck Protection Program).  “Veteran organizations,” organized under Section 501(c)(19) of the Code, are also eligible for loans under the SBA’s Paycheck Protection Program.

[2]  See id.

[3]  See CARES Act Tit. I § 1106 (Loan Forgiveness).

[4]  See CARES Act Tit. IV § 4003 (Emergency Relief and Taxpayer Protections).

[5]  See CARES Act Tit. I § 1110 (Emergency EIDL Grants).

[6]  See CARES Act Tit. II § 2204 (Allowance of Partial Above the Line Deduction for Charitable Contributions).

[7]  See CARES Act Tit. II § 2205 (Modification of Limitations on Charitable Contributions During 2020).

[8]  See CARES Act Tit. II § 2301 (Employee Retention Credit for Employers Subject to Closure Due to COVID-19).

[9]  See CARES Act Tit. II § 2103 (Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations).

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.