In March, Congress passed two important acts in rapid succession: the Families First Coronavirus Response Act ("the FFCRA") and the much larger Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), containing over 800 pages of changes designed to provide $2 trillion of financial relief to Americans and their business enterprises. This outline focuses on provisions of these acts that can impact nonprofits and, when appropriate, provides links to other articles in our firm's coverage or outside sources for a more extensive discussion.
In addition to the two federal acts referenced above, this outline provides limited additional references to other areas that nonprofits might wish to consider in light of the COVID 19 pandemic. This summary does not consider specialized incentives for particular industries or segments within the larger nonprofit community (such as healthcare), nor does it consider special rules with respect to employment practices (including expansion of mandatory leave laws), unemployment, or other areas. Finally, this summary is not intended to be (nor could it be) exhaustive; other provisions of these acts or other changes could apply to particular situations that are not discussed here. Unless otherwise stated, statutory references are to the CARES Act (Public Law 116-136, H.R. 748).
I. FEDERAL TAX LAW CHANGES (CARES ACT)
A. Expansion of Charitable Income Tax Deductions
1. "Above the Line" Charitable Income Deductions (Section 2204). For tax years beginning in 2020, eligible individuals (those who do not elect to itemize) may deduct up to $300 of qualified charitable contributions from their adjusted gross income. This deduction applies only to cash contributions to specific types of charities, with some exceptions.
2. Suspension/Expansion of Charitable Contribution Limitations for 2020 (Section 2205). Certain cash contributions ("qualified contributions") made to specific categories of charitable organizations during calendar year 2020 will, in the case of individual taxpayers, not be subject to traditional limitations that were based on adjusted gross income or, in the case of corporate taxpayers, subject to a higher limitation (25 percent instead of 10 percent). In the case of partnerships and S corporations, the election to treat certain cash contributions as being excluded from the limitations will be made at the partner or shareholder level. There is also a specific increase in the limitation applicable to charitable contributions of food, to 25 percent.
B. Payroll Tax Credits and Deferred Payment
1. Employee Retention Tax Credit (Section 2301). Tax-exempt organizations that, during 2020, experience full or partial suspension of the operation of their business in any calendar quarter as a result of orders from a governmental authority limiting commerce, travel, or group meetings because of COVID 19 are eligible for a payroll tax credit equal to 50 percent of "qualified wages" paid to employees, not to exceed $5,000 per employee for the year, based on wages paid after March 12, 2020, and before January 1, 2021. Similar to the structure used in the FFCRA, the credit will first be applied against employer payroll taxes due, and if the credit exceeds those taxes, a refund will be promptly issued.
The credit applies to all operations of tax-exempt organizations, and those organizations are required only to meet the test above. (An alternative test, applicable to business enterprises, focuses on a mathematical-decline-in-gross-receipts.)
"Qualified wages" for an employer that had an average of more than 100 full-time employees during 2019 are wages paid to employees who are not providing services because of the full or partial suspension of operation of the business as a result of orders from a governmental authority. For employers that had an average of fewer than 100 full-time employees during 2019, qualified wages are all wages paid to employees. In all cases, qualified wages paid may not exceed the amount that the employees would have been paid for working an equivalent duration during the 30 days immediately preceding the period. Qualified wages can also include the cost of employer-provided group health plan coverage for the employees for the applicable periods.
Additional special rules apply in certain situations to limit the credit and avoid the possibility of double benefits. Of particular note is a provision that limits employers to either utilizing this credit or receiving an SBA Paycheck Protection Program loan, but not being able to qualify for both. The credit is not available to governmental employers, including the government of any state or political subdivision and its agencies and instrumentalities.
2. Deferral of Employer Payroll Taxes (Section 2302). Employers will be allowed to delay payment of a portion of applicable payroll taxes without penalty or interest, except in certain circumstances, for payroll taxes due beginning on the date of the CARES Act's enactment and ending before January 1, 2021, as long as 50 percent of the amount deferred is paid before December 31, 2021, and the balance is paid before December 31, 2022. Employers that have indebtedness forgiven under the SBA Paycheck Protection Program (see below) are not eligible for payroll tax deferral under this provision. For employers that have deferred taxes under this provision and then receive lender approval for loan forgiveness under the Paycheck Protection Program, Section 2302 will apply for deferrals up to the date of loan forgiveness and the employers will not be eligible for payroll tax deferral for payroll taxes due after that date.
II. EXPANDED EMPLOYEE LEAVE TAX CREDITS (FFCRA)
Nonprofits with fewer than 500 employees must provide two expanded federal paid leaves, which are summarized in this chart. As explained in articles about the expanded Emergency Paid Sick Leave and Emergency Family and Medical Leave, certain COVID 19-related circumstances will entitle employees to leave and provide pay, within limits, that is offset by tax credits. Further explanation of how the tax credits work follows.
IRS has issued a March 20 news release (IR-2020-57) covering payroll tax credits available under the FFCRA and Notice 2020-21, which made it clear that the tax credits will apply beginning on April 1 (not April 2) through December 31, 2020. Besides summarizing benefits, the two IRS releases contain additional information regarding reimbursement to employers (via payroll tax credits and refunds to employers) of amounts paid under the FFCRA. Additional information can also be found at the IRS website, which includes a FAQs discussion and links to Form 7200 instructions on how to request an advance payment of the tax credits.
Employers receive 100 percent reimbursement for paid leave under the FFCRA. Health insurance costs are included in the credit. Reimbursement is via an immediate dollar-for-dollar tax offset against payroll taxes due. When the reimbursement amount exceeds applicable taxes due, an expedited refund process is available (two weeks or less) by using Form 7200. Eligible employers are those required to provide emergency paid sick leave and emergency paid family and medical leave under the FFCRA. Eligible employers are entitled to an additional tax credit based on costs to maintain health insurance coverage for eligible employees during the leave period.
Payroll taxes that can be offset by the credit include federal income tax withheld, and both the employee and employer shares of Social Security and Medicare taxes, with respect to all employees. The FFCRA specifically exempts wages required to be paid under the FFCRA from being subject to such taxes. A special provision eliminates potential "double benefit" by (1) reducing any tax credits available under IRC section 45S (the current provision providing tax credits for paid family and medical leave) by the amount of credits under the FFCRA; and (2) eliminating any tax credits also available for the same wages under the newly enacted Employee Retention Tax Credit. (Although both this program and the Employee Retention Tax Credit may apply to wages paid under the FFCRA, employers are eligible for only one tax credit on FFCRA payments.)
III. LOAN PROGRAMS (CARES ACT)
The CARES Act provides two expanded SBA loan programs. (Please see the links and additional explanations of these two programs in the first two bullets following this paragraph.) The Paycheck Protection Program (CARES Act Sections 1102 and 1106) is available to 501(c)(3) and 501(c)(19) veterans organizations, as well as certain tribal businesses, and includes the possibility of loan forgiveness, to the extent that the loan proceeds are used for payroll costs, rent, utilities, and mortgage interest and the employer maintains its head count and salaries/wages of its employees for the "covered period." Both the Paycheck Protection Program and Expanded Economic Injury Disaster Loan (CARES Act Section 1110) provide advantageous federally insured loans, on an expedited basis, to continue operations. (For a comparison of these two programs, see Loans Available for Nonprofits in the CARES Act.) Related rules also provide for deferral of payments under existing SBA loan programs. Finally, in some circumstances, federally backed property loans might be eligible for separate forbearance provisions that some nonprofits may find helpful. (See the link in the last bullet following this paragraph.)
See the links below for detailed information on loan assistance programs under the CARES Act and on forbearance of federally backed property loans:
CARES Act Expands Small Business Lending and Provides Potential Loan Forgiveness. In addition to the Paycheck Protection Program Loans (administered under SBA 7(a)), there is also an "Expanded Economic Injury Disaster Loan ('EIDL') & Emergency Grants" program, administered under SBA 7(b), that loosens credit standards from traditional EIDLs and even provides a rapid grant procedure that can put $10,000 into a nonprofit's hands within three days. (See the second and third articles linked in the first bullet above for more information.) These loans are available to a larger group of nonprofits than the Paycheck Protection Program.
IV. INSURANCE COVERAGE
Many nonprofits will experience events that may be covered under existing insurance policies. To assist in evaluating potential claims, please see the following articles:
V. TAX FILING AND PAYMENT DEADLINES EXTENDED
IRS has issued progressively broadened extensions of filing and payment deadlines, starting with Notice 2020-17 (March 18, 2020), and expanding the reach of that notice with Notice 2020-18. (See COVID 19 Tax Changes: Some Tax Returns and Tax Payments Are Postponed.) Generally, those notices extended some forms and payments that were due on April 15, 2020, to July 15, 2020.
Notice 2020-18 was further updated by Notice 2020-23 (April 9, 2020), which further expanded the program. IRS extended relief to additional returns, tax payments, and other actions. As a result, the extensions generally now apply to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. The extensions apply to many forms and tax payments made by tax-exempt organizations, including:
Form 990-series annual information returns or notices (Forms 990, 990-EZ, 990-PF, 990-BL, 990-N (e-postcard))
Forms 8871 and 8872
See Notice 2020-23 and Rev. Proc. 2018-58 for more information, including a complete list of affected forms, tax payments, and other time-sensitive actions. And of course, the standard automatic extension and request for further extension programs remain in effect, as always.
Other than deferrals and credits under the FFCRA and CARES Act (as referenced above) there are no general extensions on filing or paying payroll taxes; but Notice 2020-22 suspends the deposit penalty of IRC Section 6656 for an employer's failure to timely deposit "employment taxes" to the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the FFCRA and CARES Act.
On a state basis, Oregon matched the earlier IRS notices, except that it did not extend the time for making April 15 or June 15 (first- and second-quarter) estimated tax payments, which remain due for individuals and corporations. (See COVID 19: Federal, State (OR & WA), and Local Tax Update.)
VI. IRS OPERATIONS
IRS initiated its "People First Initiative" on March 25, 2020, to "help people and businesses during these uncertain times." Service centers are closed, and IRS is stressing electronic filing (versus paper). IRS has generally ceased all collection activities and has suspended existing installment payment obligations due between April 1 and July 15, 2020. IRS will continue to take steps to protect expiration of statutes of limitation. (See IRS People First Initiative. See also IRS Operations During COVID 19.)
Effective through July 15, 2020, IRS will accept images of signatures (scanned or photographed) and digital signatures on documents related to the determination or collection of tax liability, and some other documents. IRS employees may, during that period, accept documents via e-mail (recommended) and transmit documents using SecureZip or similar systems.
VII. OREGON MORATORIUM ON COMMERCIAL EVICTIONS
VIII. EMPLOYEE ASSISTANCE PROGRAMS
Changes to Qualified Retirement Plan Rules. Changes to qualified retirement plan rules permit special "Coronavirus-Related Distributions," increase retirement plan loan limits, and delay existing loan repayments. (See CARES Act Impacts Employer Retirement Plans.)
Disaster-Relief Programs. Internal Revenue Code Section 139 provides employers with the ability to make nontaxable qualified disaster-relief payments to employees for reasonable and necessary personal expenses resulting from the pandemic, as long as the expenses are not otherwise reimbursable under insurance or other programs. Payers are not required to substantiate need, and there are no dollar limits, no discrimination testing, no payroll taxes or reporting (even if paid by an employer to employees), and no deduction limitations.
501(c)(3) charities may be able to institute programs to support various classes of individuals who are adversely affected by the pandemic, but will need to consider established law surrounding grants to individuals, including how to define a charitable class, substantiating need, administering programs on a nondiscriminatory basis, and whether grants will be taxable to recipients. Charities planning to offer such grants to their own employees or to employees of a supported organization will also need to consider whether such grants are wages with respect to payroll tax withholdings, employer payroll taxes, and the potential impact on employee unemployment compensation qualification.
For a comparison of the FFCRA (emergency leave), Employee Retention Credit, and Paycheck Protection Programs, and how they interact, see: Employer COVID-19 Cost-Recovery Options
AICPA: State Tax Filing Guidance for Coronavirus Pandemic