Authored by Joua Lo and Kevin O'Connell
On March 27, 2020, the House passed and the president signed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. It marks the largest economic relief package in our nation’s history.
Much of the CARES Act involves tax and related relief for businesses and individuals but does have some relief for nonprofits as well. In addition, several revenue-raising provisions from the Tax Cuts and Jobs Act (TCJA) limiting business deductions are being temporarily rolled back or modified.
The paycheck protection program (PPP) plays a key role in the Act, making loans available to companies and certain nonprofit organizations with 500 or fewer employees. To qualify, the organization must have existed on Feb. 15, 2020 and had 500 or fewer paid employees.
Eligible nonprofit organizations with 500 or fewer employees may request an advance that does not exceed $10,000 and that shall be received within 3 days of application. The taxpayer may use the advance to:
How do I choose between PPP and EIDL?
An organization can participate in both programs, but only under certain circumstances: (a) when they receive the EIDL after January 31, 2020, but before the PPP is available, and the funds are used for a purpose other than those permitted under PPP; and (b) if the business receives an EIDL for a disaster other than COVID-19.
Organizations should carefully review their operating costs when choosing between the two programs. While taxpayers may use the PPP funds for things other than payroll, the principal objective of the program is to keep workers employed.
This is evident as the maximum loan amount available under PPP is directly tied to payroll costs. If an organization’s rent exceeds payroll costs, for example, the EIDL program may be preferable to PPP, despite the PPP’s loan forgiveness provisions.
Another factor to consider is the repayment for each program: an EIDL is repayable over 30 years and has a slightly lower maximum interest rate, while the unforgiven portion of a PPP loan is repayable over 10 years.
The federal government will supplement unemployment benefits for furloughed workers for up to four months under the “Keeping American Workers Employed and Paid” program.
Self-insured nonprofits will be eligible for reimbursement for half the costs of benefits provided to their furloughed employees.
The Act defers payment of the employer’s portion of the FICA 6.2% payroll tax liability. This deferral applies to wages incurred after the date of enactment through December 31, 2020. Accordingly, the taxpayer must pay half of the deferred payroll tax liability by December 31, 2021, and the remaining 50% by December 31, 2022. These late payments are not subject to underpayment penalties. Again, this payroll deferral applies only to the employer, not the employee, portion of the FICA 6.2% payroll tax.
The CARES Act provides a quarterly credit against certain employer payroll taxes available to employers that experienced a full or partial suspension in their operations (and, in some cases, a significant decline in gross receipts) due to COVID-19. The amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020 through December 31, 2020, not to exceed $10,000 per quarter. For this purpose, wages are payments to employees while they are unable to work due to the operational or financial difficulties described above, subject to certain limitations.
For employers with 100 or fewer employees, qualified wages are amounts paid to employees while the employer is experiencing operational or financial difficulties, without considering whether all or a portion of the employees are unable to work (e.g., the business is shut down or they’re furloughed) due to these coronavirus-related difficulties. For employers with greater than 100 employees, the bill limits qualified wages to amounts paid to employees while they are unable to work due to coronavirus-related issues.
This credit is unavailable to employers that receive a Paycheck Protection Program loan. Similarly, there may be limitations in place if the employer took the paid family and medical leave credit under the TCJA. For purposes of the employee retention credit, controlled groups are treated as one employer.
The CARES Act amends the FFCRA to make the payroll tax credits refundable for both the emergency sick leave pay and emergency Family and Medical Leave Act (FMLA) pay. Additionally, the CARES Act allows advanced provision of the two payroll tax credits; however, we expect further guidance from the Treasury Department on this.
The CARES Act also amends the FFCRA to, solely for purposes of emergency FMLA pay, include employees who are rehired by the employer, if such employee had (1) been laid off on March 1 or a later date, and (2) worked for the employer for at least 30 days of the last 60 days prior to being laid off.
In addition to the Paycheck Protection Program, the Coronavirus Economic Stabilization Act (CESA) establishes a separate $500 billion fund to, at the direction of the Treasury Department, make COVID-19 loans, loan guarantees and other investments in support of eligible organizations.
Organizations acquiring loans through CESA must also maintain their employment levels as of March 24, 2020 “to the extent practicable” and, in any case, cannot reduce their workforce by more than 10% of the March 24 baseline.
The CARES Act creates an above-the-line total charitable contribution deduction up to $300 cash for all individual taxpayers. Furthermore, the Act raises the contribution AGI limit from 60% to 100% for individuals for contributions made in 2020.
For corporations, the Act expanded the charitable contributions threshold to 25% from 10% of corporate taxable income for taxable years beginning after December 31, 2019. Also, the deductible threshold for food contributions to charitable organizations that use it for the ill or needy also increased to 25% for 2020 donations.
The TCJA limited the amount of taxable income a net operating loss (NOL) could offset to 80%. The CARES Act restores NOL usage to pre-TCJA levels, meaning NOLs can offset 100% of taxable income for 2018, 2019 and 2020 returns. The 80% limit would apply to taxable years beginning after Dec. 31, 2020. Taxpayers with NOLs that were limited to 80% of taxable income on 2018 returns should consider amending their returns to take advantage of this provision.
The TCJA also eliminated a taxpayer’s ability to carry back NOLs. The CARES Act allows NOLs from 2018 to 2020 to be carried back five years. Taxpayers with losses in those years should review prior years to determine whether to carry back their NOLs to get tax refunds. Keep in mind that the alternative minimum tax (AMT) NOL rules may still be in effect depending on the carryback year. Consequently, you may not be able to offset 100% of prior-year income for AMT purposes.
As we navigate the unchartered territory, we are here to work with you to optimize your business strategies and tax planning. Baker Tilly’s not-for-profit team has advanced knowledge and experience working with companies in the not-for-profit sector. We make it a point to stay abreast of industry news, trends and challenges.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.