Coronavirus Aid, Relief & Economic Security Act (CARES Act), (H.R. 748)
Bill #3 – Enacted March 27, 2020
Approximate appropriation: $2 trillion
Comprehensive Coronavirus Legislation Guide for the Charitable Sector
This is a summary of the third bill Congress passed to help with the effects of the coronavirus outbreak. This guide highlights the specific provisions of that bill that may impact the charitable sector. The Congress has passed four other bills which are included in the Comprehensive Guide.
The bill represents the largest-ever economic stimulus package in the United States. By comparison, the 2009 stimulus act included approximately $831 billion in appropriations. This bill is intended to address the economic fallout of the Coronavirus pandemic with a focus on helping businesses through loans and other assistance, and direct financial assistance to most American households.
Specific provisions include:
- Allocates $500 billion for assistance to businesses, states, and municipalities, with no more than $25 billion designated for passenger air carriers, $4 billion for air cargo carriers, and $17 billion for businesses critical to maintaining national security
- Creates a $349 billion loan program for small businesses
- Allocates $130 billion in relief to the medical and hospital industries
- Provides $1,200 to Americans making $75,000 or less ($150,000 in the case of joint returns and $112,500 for head of household) and $500 for each child
- Expands eligibility for unemployment insurance and provides an additional $600 per week on top of the unemployment amount determined by each state
- Expands telehealth services in Medicare
- Provides the Secretary of the Treasury with the authority to make loans or loan guarantees to states, municipalities, and eligible businesses
Relevance to the Charitable Sector with Respect to Donors and Charitable Giving
New Above-the-Line Charitable Deduction
Included in the CARES Act is a $300 above-the-line charitable tax deduction for certain qualified charitable contributions. This will allow taxpayers who do not itemize to receive a tax benefit for a qualified gift to charity up to $300.
- Under current law, a taxpayer may only claim a charitable contribution deduction if he/she elects to itemize deductions, rather than claiming the standard deduction.
- With the increased standard deductions under the Tax Cuts and Jobs Act of 2017 (TCJA), the number of taxpayers electing to itemize is much smaller.
- This new provision of the CARES Act allows taxpayers who do not itemize to claim a deduction of up to $300 for qualified charitable contributions.
- A qualified charitable contribution must be made in cash and cannot be made to certain charities, including donor-advised funds, supporting organizations, and organizations (such as many nonoperating private foundations) that are ordinarily subject to a 30% limitation on charitable deductions.
Under the CARES Act, “eligible individuals” who do not itemize are allowed to take the above-the-line deduction, so it is not possible to itemize and also take advantage of this deduction. Additionally, it appears that the $300 maximum deduction is applicable per tax return so that a couple filing a joint return is limited to a $300 deduction, but this is somewhat unclear at this time. These amendments apply to taxable years beginning after December 31, 2019, and there is no provision for this to sunset. Finally, there is nothing in the bill that requires charitable gifts eligible for this above-the-line deduction to be paid only to charities working directly with coronavirus relief, so donors may give to a wide variety of charities.
Increased Percentage Limitations for Charitable Contributions
The CARES Act temporarily suspends or increases certain percentage limitations for cash charitable contributions made during 2020.
- The CARES Act temporarily modifies certain percentage limitations on charitable contributions made during 2020.
- Under current law, the total deduction for contributions to charitable organizations by individuals generally is limited to 50% or 60% of adjusted gross income (the TCJA increased the 50% limit to 60% for cash gifts to most public charities) and 30% of adjusted gross income (for gifts to charitable organizations that do not qualify for the 50% limitation).
- Additional rules can reduce the limitation to 20% depending on the type of property gifted.
- Deductions for contributions to charitable organizations by corporations generally are limited to 10% of taxable income. In the case of charitable contributions of food, a 15% limitation applies instead.
- Under the CARES Act, the 50% limitation for individual taxpayer gifts is suspended for qualified contributions, and the 10% limitation for corporations would be increased to 25% for qualified contributions.
A qualified contribution is a cash gift made during calendar year 2020. This provision of the CARES Act excludes gifts to donor-advised funds and supporting organizations. The 30% limitation applicable to private nonoperating foundations was not changed. In addition, the 15% limitation for contributions of food would be increased to 25% for any charitable contributions of food during 2020.
Under the CARES Act, individuals who have a work-eligible social security number and make up to $75,000 (individuals), $112,500 (head-of-household) and $150,000 (joint filers), including individuals with little or no income, will receive rebate checks of $1200 with $500 additional for each child. Lesser rebate amounts will be provided to those who make up to $99,000/$146,500/$198,000. For charitably minded individuals, this extra money may be a source for charitable gifts, particularly in light of the above-the-line deduction referenced above.
- All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work-eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate.
- In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.
- For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as the IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative, their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit.
- The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Relevance to the Charitable Sector as Businesses and Employers
Employer-Provided Educational Assistance
The definition of tax-free employer-provided educational assistance is expanded to include up to $5,250 in student loan payments made by an employer between March 27, 2020 and the end of 2020.
- This provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis.
- Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.
- The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, 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 date of enactment and before January 1, 2021.
Employee Retention Credit
Under this provision, eligible employers can receive a refundable tax credit up to $5000 per employee (50% of wages up to the first $10,000) applied against payroll tax liability. Certain tax-exempt organizations that meet eligibility requirements can participate.
- At a high level, section 2301 of H.R. 748 provides for a refundable credit of up to $5,000 per employee against employment taxes for employers who retain employees during the COVID-19 crisis. It must be taken in lieu of the SBA paycheck protection loan program described below.
More technically, the employee retention credit is available to any “eligible employer” for “each calendar quarter” in an amount equal to 50 percent of the “qualified wages” paid with respect to “each employee of such employer for such calendar quarter” between March 12, 2020 and January 1, 2021. However, the total amount of “qualified wages” that can be taken into account “for all calendar quarters” is $10,000.
- Thus, the employee retention credit has a maximum dollar value to an employer of $5,000 per employee, which is realized in part over the calendar quarters that the employer retains the employee.
- This credit is applicable against the employer-side portion of employment taxes (reduced by the partial credits enacted in the Families First Coronavirus Response Act, i.e., the “second CARES Act”) with respect to all the “wages” paid by an employer of all of the employees of that employer for a calendar quarter. Any excess amount of credit for a quarter is refundable to the employer.
- An “eligible employer” is one that was engaged in a business in 2020 and which meets either of two standards, measured on a quarterly basis. The first is met where the employer’s business operations were “fully or partially suspended” during the calendar quarter due to government orders to limit commerce, travel, or group meetings due to COVID-19. Nonprofits are deemed to have been engaged in a trade or business for these purposes and to have been fully or partially suspended due to COVID-19. The second occurs where the business has suffered a significant decline as a result of COVID-19.
The measure for such a decline is the period that begins with the first calendar quarter where the business’s gross receipts for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year and ends the calendar quarter beginning after the first calendar quarter where gross receipts are at least 80 percent of gross receipts for the same calendar quarter in the prior year. In other words, a business first meets this test where gross revenues have declined by more than 50 percent versus the prior year’s calendar quarter and continues to meet this test until such time as revenues have increased to at least 80 percent of the prior year’s calendar quarter.
The meaning of qualified wages depends on the size of the business. For businesses of up to 100 employees, qualified wages of an eligible employer are simply the wages paid by the employer (subject to the limitation described below). For businesses of 101 or more employees, qualified wages are wages paid with respect to which an employee is not providing services to the employer due to COVID-19. For these purposes, wages include qualified health plan expenses properly allocable to the underlying wages. In both cases, wages paid cannot exceed those paid for work in the 30 days immediately preceding the period during which a business qualifies for this relief.
Under future rules (likely to be issued by the Treasury Department and IRS) employers cannot take into account certain employees for purposes of the credit. For example, parties who are related to the employer (i.e., the business) in certain ways (e.g., the business’s owner(s), certain family members and/or related parties) are ineligible for the credit, as are certain new hires (e.g., persons who have not performed a threshold number of hours of service for the employer).
Under future rules (likely to be issued by the Treasury Department and IRS), the portion of wages that equals the value of the credit taken by an employer with respect to an employee is non-deductible. In other words, if an employer takes a $5,000 credit with respect to an employee, the employer’s future deduction for the employee’s compensation is reduced by $5,000. Until further guidance is issued, however, this result is not precisely clear.
UPDATE: on April 29, 2020, the IRS published a set of FAQs to address many of the questions posed above as well as to provide additional guidance for this program. The FAQs can be accessed at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
- An employer can elect to not apply the provision. In addition, governmental employers and employers taking an SBA 7(a) loan by virtue of section 1102 of H.R. 748 are ineligible for the credit. See also “Coordination of Different Benefits” at the end of this paper.
- The provision also requires the IRS (“shall”) to waive penalties for a failure of an employer to deposit applicable employment taxes if the IRS determines that the failure was due to a “reasonable anticipation” of a credit allowed by the provision.
Expands unemployment insurance to cover part-time employees who are unable to work due to COVID-19 and expands coverage by 13 extra weeks. This provision also allows funding for the first week of unemployment if states waive the one-week waiting period.
- The CARES Act creates three new unemployment insurance programs: Pandemic Unemployment Compensation, Pandemic Emergency Unemployment Compensation, and Pandemic Unemployment Assistance.
- All three programs are fully federally funded. States will also receive additional administrative funds to operate these programs.
Pandemic Unemployment Compensation
- The CARES Act temporarily supplements Unemployment Insurance (UI) benefit amounts and extends the duration of those benefits.
- From the date the bill is signed through July 31, 2020, all regular UI and Pandemic Unemployment Assistance claimants will receive their usual calculated benefit plus an additional $600 per week in compensation.
- This Pandemic Unemployment Compensation (PUC) is a flat amount to those on UI, including those who are receiving a partial unemployment benefit check.
- PUC also goes to those receiving the new Pandemic Unemployment Assistance program described below.
- PUC may be paid either with the regular UI payment or at a separate time, but it must be paid on a weekly basis.
- PUC is not income for purposes of eligibility for either Medicaid or CHIP.
Pandemic Emergency Unemployment Compensation (PEUC)
- This is another benefit that provides an additional 13 weeks of state UI benefits, which will become available after someone exhausts all their regular state UI benefits.
- All but eight states offer 26 weeks of UI benefits. To receive PEUC, workers must be actively engaged in searching for work.
- The bill explicitly provides, however, that “a State shall provide flexibility in meeting such [work search] requirements in case of individuals unable to search for work because of COVID-19, including because of illness, quarantine, or movement restriction.”
Pandemic Unemployment Assistance (PUA)
- Provides emergency unemployment assistance to workers who are left out of regular state UI or who have exhausted their state UI benefits (including any Extended Benefits that might become available in the future).
- Up to 39 weeks of PUA are available to workers who are immediately eligible to receive PUA.
- The program will expire on December 31, 2020, unless otherwise extended.
- Importantly, this program will provide income support to many workers who are shut out of the state UI systems in this country.
- In fact, workers who are eligible for state UI are not eligible for the PUA program.
Those eligible for PUA include self-employed workers, including independent contractors, freelancers, workers seeking part-time work, and workers who do not have a long enough work history to qualify for state UI benefits.
In most states, however, “gig” workers should qualify for regular UI because of the broad definitions of employment in so many state UI laws, and should be encouraged and supported in applying for regular UI. States should be encouraged to streamline their applications and to request pay data in bulk from major companies. In states that have passed formal exemptions from UI for transportation network company drivers or app-based workers, PUA will provide crucial benefits.
Applicants will need to provide self-certification that they are (1) partially or fully unemployed, OR (2) unable and unavailable to work because of one of the following circumstances:
- They have been diagnosed with COVID-19 or have symptoms of it and are seeking diagnosis;
- A member of their household has been diagnosed with COVID-19
- They are providing care for someone diagnosed with COVID-19
- They are providing care for a child or other household member who can’t attend school or work because it is closed due to COVID-19
- They are quarantined or have been advised by a health care provider to self-quarantine
- They were scheduled to start employment and do not have a job or cannot reach their place of employment as a result of a COVID-19 outbreak
- They have become the breadwinner for a household because the head of household has died as a direct result of COVID-19
- They had to quit their job as a direct result of COVID-19
- Their place of employment is closed as a direct result of COVID-19
- They meet other criteria established by the Secretary of Labor
Workers are not eligible for PUA if they can either telework with pay or are receiving paid sick days or paid leave. Workers must be authorized to work to be eligible for PUA, meaning that undocumented workers will not qualify.
- The PUA program will run from January 27, 2020 through December 31, 2020.
- Workers will be eligible for retroactive benefits and can access benefits for a maximum of 39 weeks, including any weeks for which the person received regular UI, but eligibility will sunset on December 31, 2020 absent any extensions.
- PUA benefits are calculated the same way as they are for the federal Disaster Unemployment Assistance program under the Stafford Act, which is the model for the PUA program.
- PUA will have a minimum benefit that is equal to one-half the state’s average weekly UI benefit (about $190 per week).
Short-Time Compensation (STC)
- Also known as work-sharing, programs help employers avoid layoffs by putting workers on part-time schedules with partial unemployment benefits to help make up for some of the lost income.
- Under the CARES Act, the federal government will fully reimburse states for all STC programs already in place that conform with the requirements of Section 3306(v) of the Internal Revenue Code.
- The Act also provides $100 million in grants to states to implement, improve, and promote STC programs.
There is a “non-reduction rule” in the Act, which means that as long as the states are participating in these programs, they may not do anything to decrease the maximum number of weeks of UI or the weekly benefits available under state law as of January 1, 2020.
In addition, most states have a statutory one-week “waiting period” for people to receive UI benefits. But under the CARES Act, states that waive the one-week waiting period will be fully reimbursed by the federal government for that week of benefits paid out to workers plus the administrative expenses necessary for processing those payments.
Deferral of Employer-Paid Social Security Taxes
The CARES Act allows employers, including nonprofits, to defer the payment of the employer’s share of social security taxes (currently 6.2% of wages). However, employers cannot defer these taxes if they are also receiving loan forgiveness under the Paycheck Protection Program described below.
Small Business Administration (SBA) Loans
The CARES Act creates a new loan program for businesses that can be utilized by 501(c)(3) charitable organizations, and 501(c)(19) veterans organizations that meet eligibility requirements (other types of 501(c) organizations are not included in this program).
The “Paycheck Protection Program” (PPP) allows the SBA to provide new loans backed by the federal government for business purposes including payroll, rent, utilities, insurance premiums, health benefits, and other operational costs necessary to keep businesses afloat. The relatively short window of availability is February 15, 2020 to June 30, 2020. Loan forgiveness is also possible under certain conditions, as discussed below.
- For many businesses, another important provision of the CARES Act is the expansion of the current Small Business Act section 7(a) loan program. In the case of the expanded 7(a) program (hereinafter, the “Paycheck Protection Program” or “PPP”), the loan can function much like a grant given that it can be all (or partially) forgivable.
- Prior to the CARES Act, in order to be eligible for 7(a) Loan a small business applicant had to establish that it was a for-profit operating business located in the U.S. that met the size requirements (based on headcount and/or revenue) and demonstrated a need for the credit. The CARES Act modifies these general eligibility criteria, expanding them in several key ways.
- First, non-profit entities are specifically eligible for 7(a)(36) Loans. Second, businesses need not demonstrate a “need” for the credit. In addition, size restrictions for businesses are in many cases tightened, with entities generally only eligible for a 7(a)(36) Loan to the extent that they have 500 or fewer employees. An exception to this is where the “general,” pre-CARES Act 7(a) Loan size restriction for the business is greater than 500 employees.
- Under the PPP, an eligible business (or nonprofit) can borrow up to 2.5 times its average total monthly payroll costs (subject to the limits described below) that were paid during the 1-year period before the date that the loan is made (with a special rule for seasonal employers and new businesses), up to a max loan amount of $10 million.
The CARES Act also expands the types of uses to which a 7(a)(36) Loan may be put to use (i.e., beyond those allowable for 7(a) Loans, generally, which already include things like material, equipment, supplies, etc.). During the period between February 15, 2020 and June 30, 2020, those additional uses include:
- Payroll costs
- Costs related to group health benefits
- Salaries, commissions, or other compensation
- Interest payments on mortgage obligations
- Interest on previously-incurred debt obligations.
For these purposes, “payroll costs” are the sum of compensation payments to (or with respect to) employees for salary, tips, leave, separation, group health, retirement, or state or local employment taxes. It does not include compensation amounts over $100,000 annually (prorated for the period), federal employment taxes, compensation to employees outside of the U.S., qualified sick leave, or qualified family leave.
Loans under the PPP are fully guaranteed by the federal government, must
- Be nonrecourse to the borrower
- Require no personal guarantee or collateral
- Have an interest rate of 4 percent or less (it appears the current rate may be as low as 1%).
A borrower under the PPP must certify in “good faith” that
- Current economic conditions necessitated the loan
- The funds will be used to retain workers and make other eligible payments
- The borrower has not applied for another 7(a)(36) Loan for “the same purpose and duplicative of” the requested loan, and (iv) the borrower has not in fact received another 7(a)(36) Loan for the same purpose and duplicative of the requested loan.
- 7(a)(36) Loans may have a maximum maturity of 10 years beyond the date that the borrower applies for loan forgiveness. In addition, payments on a 7(a)(36) Loan are deferred for at least six months (and up to one year). Presumably, this is measured for the date the loan obligation is incurred.
Under the PPP, these 7(a)(36) Loans are designed to be at least in-part forgiven, and any loan forgiveness will not be treated as taxable income to the borrower. Amounts with respect to which forgiveness is granted are still deductible for purposes of the Internal Revenue Code.
For example, it would appear that there is no limitation with respect to these amounts for purposes of the deduction under section 199A. In general, the amount of payroll, interest paid on a covered mortgage obligation, covered rent payments, and covered utility payments that are actually paid by the borrower during the eight-week period beginning on the date the loan is obtained is forgivable. The amount of forgiveness cannot exceed the amount of 7(a)(36) Loan principal (i.e., not principal plus interest).
Borrowers must make payments when the loan is due if loan proceeds were used for anything other than payroll costs, mortgage interest, rent, and utilities payments over the eight weeks after getting the loan. Due to likely high subscription, Treasury is anticipating that not more than 25% of the forgiven amount may be for non-payroll costs. Additionally, repayment is required if the employer does not maintain its staff and payroll according to the following rules:
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- To request forgiveness, businesses can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
- By way of example, assume that a business took out a $100,000 7(a)(36) loan and paid, during the eight-week period beginning on the date the 7(a)(36) Loan is entered into, the following costs: $20,000 in covered rent, $20,000 in payroll (for 5 employees at $4,000 each), and $10,000 in covered utilities. The amount of the loan that could be forgiven would be $50,000.
- Now, assume that instead of keeping all 5 employees during the period, the business let two employees go. This would reduce wages for the period by $8,000, and the total amount that could be forgiven would be only $42,000. Thus, reducing wages or headcount during this 8-week period will always directly reduce the “pool” of potential forgiveness.
- In addition to the above, there is also a separate reduction in the amount of potential loan forgiveness for certain reductions in headcount or reductions in salary expenses. One reduction is based upon any reduction in the number of full time equivalent (“FTE”) employees during the eight-week period. Layoffs occurring after this eight-week period are ignored. This reduction is calculated by taking the otherwise allowable amount of forgiveness and multiplying it by a fraction, the numerator of which is the average number of FTE employees employed per month during the eight-week period, and the denominator of which is the average number of FTE employees employed per month during either the period from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 (the borrower may elect which period applies in the case of the denominator).
- Further, the amount of potential forgiveness is reduced (dollar-for-dollar) by the amount of wage decreases implemented during the eight-week period for employees who make an annualized amount of $100,000 or less that exceed 25 percent of the employee’s salary for the most recent quarter before the eight-week period. Thus, if an employee’s wages are cut by 30 percent, the forgivable amount would be reduced, dollar-for-dollar by the value of 5 percent of that employee’s wages for the eight-week period.
- With respect to both of these additional reductions, there is an exception for certain layoffs of employees or salary reductions that are “cured” by June 30.
- The following is a summary of how the reduction could work. Business A has 10 employees during the prior-year period but reduces to 5 employees during the eight-week period after the 7(a)(36) loan is entered into. Business A does not cure the reduction. Assume further that the potential “pool” of loan forgiveness is otherwise $50,000. Under the bill, the forgiveness is limited to $25,000 (i.e., $50,000 times 5/10).
- In order to have a 7(a)(36) Loan forgiven according to these terms, a borrower must provide the lender at least the following information: (a) documentation with respect to its full time equivalent employees and payroll tax filings, (b) documentation with respect to payments of amounts that are forgivable under the program (e.g., rent, utility payments, etc.), and (c) a certification that the documentation is accurate and that the requested amount of forgiveness was used to retain employees and make forgivable payments.
- Notwithstanding, there is some ambiguity as to which types of businesses are eligible for the PPP. The tension in understanding the limits to which businesses are eligible for the PPP as a result of the provision’s drafting. The provision clearly expands access to a “nonprofit organization,” and also indicates that a “business concern” is eligible. The SBA regulations governing small business loans (see 13 C.F.R. sec. 121.105) define “business concern” as “a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.” Per these regulations, a business concern can take the legal form of a proprietorship, partnership, LLC, corporation, JV, association, trust, or co-op. As an aside, the CARES Act is clear that generally, sole proprietors, independent contractors, and self-employed individuals are eligible for the PPP.
- However, in the regulations defining the general rules for all SBA loan programs (see 13 C.F.R. sec. 120.110), there are a number of businesses that are excluded from participation. It is not clear whether these restrictions govern (or are ignored) for purposes of defining a “business concern” for purposes of the CARES Act.
These potentially excluded businesses are:
- financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances)
- passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except for Eligible Passive Companies under 13 CFR section 120.111)
- life insurance companies [Note: this does not include agents or apparently, brokers]
- businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify)
- pyramid sale distribution plans
- businesses deriving more than one-third of gross annual revenue from legal gambling activities;
- businesses engaged in any illegal activity;
- private clubs and businesses which limit the number of memberships for reasons other than capacity;
- government-owned entities (except for businesses owned or controlled by a Native American tribe);
- businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting;
- loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
- businesses with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
- businesses in which the SBA lender (or certain related parties) owns an equity interest
- businesses which:
- present live performances of a prurient sexual nature; or
- derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature
- unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and certain businesses related to such a business (e.g., a successor business)
- businesses primarily engaged in political or lobbying activities
- speculative businesses (such as oil wildcatting)
In terms of other rules relating to eligibility for the PPP, certain industries are exempt for purposes of the 500-employee rule from an “affiliation” rule that could aggregate independently owned/operated franchises.
- CARES Act Benefits for Small Businesses and Tax-Exempt Organizations
- US Chamber of Commerce: Coronavirus Emergency Loans - Guide and Checklist for Small Business and Nonprofits
- SBA Instructions and Guidance
- Treasury Department Paycheck Protection Program Guide
- SBA Interim Final Rule on PPP
- PPP Application
- Treasury FAQs on Paycheck Protection Program
Small Business Administration Disaster Loan Program Expanded
The SBA Emergency Economic Injury Disaster Loan (EIDL) Program is expanded by the CARES Act to loosen eligibility requirements and provide for emergency loan advances up to $10,000 for businesses applying for loans under this program in response to the Coronavirus/COVID-19. https://covid19relief.sba.gov/#/
- The CARES Act expands the Small Business Administration (SBA) Economic Injury Disaster Loan Program (EIDL), a program that has been in existence for many years. The EIDL program was created to assist businesses, renters, and homeowners located in regions affected by declared disasters. Businesses, including nonprofits in existence on January 31, 2020, that have suffered substantial economic injury caused by a disaster can apply. Eligible applicants include:
- Businesses with fewer than 500 employees
- Cooperatives, ESOPs, and tribal small businesses with fewer than 500 employees
- Sole proprietors
- Independent contractors
- Most private nonprofits
The maximum EIDL is a $2 million working capital loan at a rate of 3.75% for businesses and 2.75% for non-profits with up to a 30-year term, and payments for EIDLs related to coronavirus are deferred for one year. Additionally, loans up to $200,000 can be approved without a personal guarantee and approval can be based on a credit score without providing first-year tax returns, but borrowers must allow the SBA to review tax records. Borrowers do not have to prove they could not get credit elsewhere, and no collateral is required for loans of $25,000 or less. For loans of more than $25,000, a general security interest in business assets can be used instead of real estate collateral.
Currently, eligible applicants for an EIDL can receive a $10,000 emergency grant within three days of application (through Dec. 31, 2020) and there is no obligation to repay the grant. It is not necessary to have an approved EIDL loan to receive the $10,000 emergency grant; however, if a business is able to secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount of the PPP loan.
The Paycheck Protection Program (PPP) provisions in the CARES Act prohibits borrowers from taking out two loans for the same purpose, so a business may not be able to take advantage of this program and a PPP loan.
Apply online at www.SBA.gov/disaster.
Other Nonprofit Lending Programs
Nonprofit organizations with between 500 and 10,000 employees will have access to low-interest, deferred-payment loans to support operations provided they retain 90% of their workforce until September 30, 2020 and satisfy other requirements.
- As part of the CARES Act (and the $500 billion Industry Stabilization Fund), $454 billion has been allocated to “nonprofit organizations” and businesses that have between 500 and 10,000 employees, deemed “mid-sized businesses” (airlines, air cargo companies, and national security businesses are not eligible).
- The Treasury Department and the Federal Reserve will implement a special Federal Reserve facility that provides financing to the banks and other lenders that will make these loans. It is expected that these loans will benefit large nonprofit employers, including hospitals and universities.
- The loans will carry an interest rate of no more than 2% per year, and no principal or interest will be due on the loans for at least the first six months after the loan is made. The term “nonprofit organization” is not defined for purposes of the Fund, so it is unclear whether nonprofits other than those exempt from tax under section 501(c)(3) of the Code are eligible. Unlike the Paycheck Protection Program loans, loans from this Fund are not eligible for forgiveness.
The Secretary of the Treasury is supposed to publish application procedures and minimum requirements for making loans and providing loan guarantees; however, eligible nonprofit organizations applying for direct loans under this program will be required to certify that:
- the uncertainty of economic conditions makes the loan request necessary to support ongoing operations;
- funds received will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, through September 30, 2020;
- the recipient intends to restore not less than 90% of its February 1, 2020, workforce and to restore all compensation and benefits to the workers no later than four months after the termination date of the public health emergency declared by the Secretary of Health and Human Services in response to COVID-19;
- the recipient is created/organized and domiciled in the United States with significant operations and a majority of employees located/based in the United States;
- the recipient will not outsource or offshore jobs for the term of the loan plus an additional two years;
- the recipient is not a debtor in a bankruptcy proceeding;
- the recipient will not abrogate existing collective bargaining agreements for the term of the loan plus an additional two years; and
- the recipient will remain neutral in any union organizing effort for the term of the loan.
UBIT and Treatment of Net Operating Losses (NOLs)
The 2017 TCJA made changes to the treatment of NOLs that are now suspended by the CARES Act. Although this provision does not change the UBIT silo requirements, it may affect how UBIT is calculated for some organizations.
Coordination of Different Benefits:
Persons or entities who obtain a PPP loan and receive any forgiveness with respect to such loan are statutorily barred from also receiving an employee retention credit, as well as barred from deferring payment with respect to their employer-side employment tax obligations. Persons or entities who receive an employee retention credit may also defer payment with respect to their employer-side employment tax obligations. In this way, the decision for a person or entity is whether to obtain forgiveness with respect to a PPP loan, or to receive an employee retention credit and defer the payment of employer-side employment tax obligations. The only exception to this either/or dynamic is where a person or entity obtains a PPP loan but seeks no forgiveness with respect thereto. In such a case, the person or entity can also receive an employee retention credit and deferral with respect to the payment of their employer-side employment tax obligations.