Tag: CARES Act

Taxpayers Provided With Flexibility To Make Favorable Adjustments To Depreciation

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In April 2020, the IRS released several pieces of guidance providing taxpayers with the ability to receive immediate cash flow benefits and implement tax planning opportunities associated with changes made to depreciation under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The procedures in the guidance summarized below present taxpayers with a limited time period in certain circumstances to claim additional depreciation expense for assets placed in service during 2018, 2019 and 2020. While many of the benefits are associated with the depreciation of qualified improvement property (QIP), several provisions apply to other types of depreciable property as well.

The legislative history to the 2017 tax law known as the Tax Cuts and Jobs Act (TCJA) signaled Congress’ intent to treat QIP as 15-year, bonus-eligible property. However, due to a drafting error, QIP was inadvertently characterized as 39-year property ineligible for bonus depreciation. On March 27, 2020, the CARES Act corrected this drafting error by treating QIP placed in service after December 31, 2017, as bonus-eligible, 15-year property. In response to the retroactive correction, the IRS released Rev. Proc. 2020-25 to provide guidance allowing taxpayers to claim additional depreciation by amending their prior return(s) or filing an automatic Form 3115, Application for Change in Accounting Method. As further discussed below, Rev. Proc. 2020-25 also provides taxpayers the ability to revoke a prior election out of bonus depreciation or make a late election to elect out of bonus depreciation while Rev. Proc. 2020-22, provides taxpayers with the ability to make or revoke a late election under Section 163(j). Additionally, Rev. Proc. 2020-22 sets forth the procedures for taxpayers to make other Section 163(j) elections under the CARES Act, including the election out of the 50% adjusted taxable income (ATI) limitation for 2019 or 2020 and the election to use 2019 ATI in a 2020 taxable year.

Under Section 163(j)(7)(A), as amended by TCJA, certain taxpayers are allowed to make an irrevocable election (real property trade or business election or farming business election) to opt out of the interest expense deduction limitation under Section 163(j). In exchange for being able to deduct the full amount of business interest expense, taxpayers making the election must calculate depreciation expense for nonresidential real property, residential rental property, and qualified improvement property using the Alternative Depreciation System (ADS), which generally requires longer recovery periods as compared to the General Depreciation System (GDS).

Given the drafting error in the TCJA, many taxpayers with QIP placed in service during 2018 or 2019 chose to make the real property trade or business election (or farming business election) due to the minimal difference between GDS and ADS depreciation for QIP. Now that QIP is bonus-eligible, many taxpayers may find more benefit if they deduct additional depreciation expense relative to the deferral of interest expense under Section 163(j). Accordingly, Rev. Proc. 2020-22 provides such taxpayers relief by allowing them to revoke their election made on prior year returns and claim additional depreciation expense under GDS.

Taxpayers that adjust their prior-year depreciation (and/or Section 163(j) limitation, if revoking an election under Rev. Proc. 2020-22) will need to consider any ancillary effects of the adjustments. For instance, provisions such as Section 263A, which requires taxpayers to capitalize depreciation associated with the production or resale of inventory, or Section 250, which involves the computation of a taxpayer’s depreciable basis in tangible property, may need to be adjusted in certain instances. In addition, if the additional depreciation expense from QIP results in a taxpayer generating a loss in a taxable year that is eligible for carryback to a prior year with a higher tax rate, the difference in tax rates may generate permanent tax savings. As such, it is essential for taxpayers to consider the comprehensive impact on their tax positions when evaluating potential action steps provided under the two revenue procedures.
 

Rev. Proc. 2020-25 – Adjusting Depreciation Expense for Prior Years

Rev. Proc. 2020-25 provides that changing the depreciation of QIP to 15-year, bonus-eligible property constitutes a change from an impermissible to permissible method of accounting. With respect to QIP placed in service by the taxpayer after December 31, 2017, the revenue procedure allows taxpayers to correct their depreciation expense by either amending their returns or filing an automatic Form 3115 with a timely filed (including extensions) federal tax return.

Important considerations under Rev. Proc. 2020-25 are summarized below:

  • Taxpayers choosing the amended returns option generally must file on or before October 15, 2021. Partnerships subject to the centralized partnership audit regime may file an amended Form 1065 under Rev. Proc. 2020-23, but must do so before September 30, 2020. If a partnership subject to the centralized partnership audit regime chooses not to file an amended Form 1065 or cannot file an amended Form 1065 (e.g., because the placed-in-service year of QIP is not within the scope of Rev. Proc. 2020-23), it may file an administrative adjustment request (AAR) instead. Partnerships that are not subject to the centralized partnership audit regime cannot file an AAR and must therefore file an amended return.
  • The amended returns or AARs must include the adjustment to taxable income for the change in QIP depreciation expense as well as any collateral adjustments (e.g., Section 263A). Such collateral adjustments may include adjustments to original or amended returns for any affected succeeding taxable years as well, such as depreciation expense on a 2019 return that was filed by a partnership on or before March 15, 2020.
  • Taxpayers choosing to file a Form 3115 may avail themselves of a new automatic change #244, which applies only to QIP placed in service after December 31, 2017. This new method change provides taxpayers with streamlined procedures by temporarily waiving certain eligibility rules and offering reduced filing requirements. If taxpayers choose the Form 3115 option, the additional depreciation is computed as a Section 481(a) “catch-up adjustment” that is included in the return as a reduction to taxable income for the year of change.
  • Taxpayers are also allowed to make a late election to opt out of bonus depreciation, make a late election to use ADS, or revoke an election out of bonus depreciation by filing an amended return, amended Form 1065 or AAR for the year the property was placed in service. Alternatively, taxpayers can forego amending returns (or filing an AAR) by filing an automatic method change #245 for the first or second taxable year after the taxable year in which the taxpayer placed the property in service, or, if later, the taxable year for which the taxpayer timely files an original federal income tax return on or after April 17, 2020, and on or before October 15, 2021. Importantly, these late elections and revocation are not limited to QIP only.
  • Rev. Proc. 2020-25 also clarifies that for purposes of the Remodel-Refresh Safe Harbor under Rev. Proc. 2015-56, taxpayers may treat capital expenditures under the remodel-refresh safe harbor as QIP to the extent the taxpayer can substantiate that such expenditures qualify as QIP. 

Rev. Proc. 2020-22 – Elections under Section 163(j)

Rev. Proc. 2020-22 allows taxpayers to retroactively withdraw or make a late election under Sections 163(j)(7)(B) (real property trade or business) or 163(j)(7)(C) (farming business). Additionally, taxpayers may also make certain elections related to amendments made to Section 163(j) under the CARES Act. Key considerations of Rev. Proc. 2020-22 are described in further detail below:

  • Taxpayers may withdraw a Section 163(j)(7) election for their 2018, 2019 or 2020 taxable year by filing an amended federal income tax return, amended Form 1065, or AAR, as applicable, on or before October 15, 2021. Partnerships filing an amended Form 1065 pursuant to Rev. Proc. 2020-23 must file the amended return and furnish corresponding Schedules K-1 before September 30, 2020. The adjustments to taxable income for the late Section 163(j) election must include any collateral adjustments to taxable income or to tax liability, including any additional depreciation allowed under GDS. Further, a taxpayer must also file amended federal income tax returns, amended Forms 1065, or AARs, as applicable, for any affected succeeding taxable years.
  • Rev. Proc. 2020-25 clarifies that a taxpayer withdrawing an election under Section 163(j)(7) must do so under the provisions of Rev. Proc. 2020-22 exclusively. That is, taxpayers cannot retroactively withdraw a real property trade or business or farming business election by filing a Form 3115 and claiming additional depreciation or adding back interest expense via a Section 481(a) adjustment. Partnerships contemplating claiming additional depreciation will need to fully evaluate the manner in which these benefits are obtained since a Form 3115 allows the current year partners to benefit from the bonus depreciation whereas an amended return or AAR gives the benefit to adjusted year partners.
  • Taxpayers may make a late election under Section 163(j)(7) for their 2018, 2019 or 2020 taxable year by filing an amended federal income tax return, amended Form 1065, or AAR, as applicable, on or before October 15, 2021. Partnerships filing an amended Form 1065 pursuant to Rev. Proc. 2020-23 must file the amended return and furnish corresponding Schedules K-1 before September 30, 2020. Similar to the revocation of the Section 163(j)(7) election, the adjustments to taxable income for the late Section 163(j) election must include any collateral adjustments to taxable income or to tax liability, such as the amount of depreciation allowed or allowable as determined under the rules provided in Rev. Proc. 2019-8.
  • Taxpayers may elect out of the 50% adjusted taxable income (ATI) limitation, which was increased from 30% under the CARES Act for a 2019 or 2020 year. A partnership can make this election only for a 2020 taxable year. To effectuate the election, a taxpayer must timely file a federal income tax return or Form 1065, an amended return, amended Form 1065, or AAR, as applicable, using the 30% ATI limitation. No formal statement is required.
  • If a taxpayer made the election not to apply the 50% ATI limitation for 2019 or 2020, but wishes to revoke the election later, it may file an amended federal income tax return, amended Form 1065, or AAR, as applicable, for the applicable tax year using the 50% ATI limitation.
  • Taxpayers may also elect to use their ATI for the last taxable year beginning in 2019 as the ATI for any taxable year beginning in 2020 under Section 163(j)(10)(B). This can be accomplished by timely filing a federal income tax return, Form 1065, an amended federal income tax return, amended Form 1065, or AAR, as applicable, for the 2020 taxable year using the amount of ATI from 2019. The election can also be revoked by amending the return/Form 1065 or filing an AAR.
  • A partner may elect out of the 50% excess business interest expense (EBIE) rule by timely filing a federal income tax return or Form 1065, an amended federal income tax return, amended Form 1065, or AAR, as applicable, for the partner’s first taxable year beginning in 2020. The election is made by not applying the 50% EBIE rule in determining the Section 163(j) election. Similar to the election under Section 163(j)(10)(B), the election can be revoked by amended the return/Form 1065 or filing an AAR.


Key Takeaways

Rev. Procs. 2020-25 and 2020-22, in conjunction with the changes made under the CARES Act, provide taxpayers with a multitude of immediate cash flow benefits and planning opportunities. As many of these changes involve multiple avenues for taxpayers seeking relief, taxpayers must consider several pertinent factors in assessing the most advantageous approach for their positions, including any corollary effects on other provisions, the NOL carryback potential from a year when the tax rate was 21% to a tax year when rates were as high as 35 percent, and the administrative complexities associated with implementing the opportunities. For example, while amending a prior year return may be more burdensome from a compliance standpoint, taxpayers may find the additional effort worthwhile in exchange for the ability to receive an immediate refund and interest. Generally, filing a Form 3115 provides taxpayers with a more streamlined process of claiming additional depreciation, although additional complexities may arise if the taxpayer is a partnership with different partners in the year of change versus the year(s) the assets were originally placed in service.  

As several of the beneficial opportunities provided in Rev. Proc. 2020-25 and Rev. Proc. 2020-22 must be made within a limited time period, taxpayers should begin evaluating their options as soon as possible to ensure adequate time to implement an appropriate action plan.

Manufacturing Industry Impacts From The CARES Act

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On Friday, March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), a $2 trillion stimulus package intended to help mitigate the economic devastation caused by the novel coronavirus (COVID-19).

The stimulus is good news for manufacturers, many of whom are struggling given the current economic circumstances and stand to benefit financially from the package. However, the CARES Act also includes restrictions and responsibilities that manufacturers need to be aware of, especially manufacturers that produce supplies related to the healthcare industry, including ventilators, products like Personal Protective Equipment (PPE) and hand sanitizer, and medication.

We’ve summarized some of the key portions of the CARES Act for manufacturers.
 

Lending Programs The CARES Act is comprised of multiple loan programs targeted at different groups impacted by COVID-19. The programs manufacturers may be eligible for are highlighted in the figure below.

SBA Payment Protection Program – $350B
Under the Small Business Administration (SBA) Paycheck Protection Program, specific funds totaling $350 billion have been set aside for small businesses, to be administered by SBA-approved lenders. Loan amounts for this provision may only be used for rent, insurance premiums, utility payments, mortgages, and payroll.

In order to qualify for a loan under this program, your company must employ 500 workers or fewer (both full-time and part-time), or they must meet the industry size standard set forth by the SBA. The SBA’s size standard for auto manufacturers, for example, is 1,500 employees or fewer.

The maximum amount for these loans is 2.5 times the average total monthly payroll costs for the prior 12 months, or up to $10 million. The interest rate may not exceed 4%. Businesses can also defer payment of the principal, interest and fees for six months to one year.

One of the biggest appeals of the SBA Paycheck Protection Program is that the loans are forgivable, assuming certain conditions are met. The SBA can grant forgiveness up to the total amount borrowers spend of up to eight weeks of payroll costs and mortgage interest, rent, and utility payments between February 15 and June 30, 2020, if the borrower retains its employees and does not reduce salary levels more than 25%. Loan forgiveness is prorated for organizations that do not maintain payroll. The CARES Act provides an exception to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020. Forgiven amounts do not need to be reported as taxable income. The Treasury Department is anticipating that not more than 25% of the forgiven amount may be for non-payroll costs.

The application is available through the Treasury Department’s website here. You will need to complete the PPP loan application and include your payroll information. Once complete, submit to an approved lender by June 30, 2020.

Small businesses, nonprofits, and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders starting on April 3, 2020. Independent contractors and self-employed individuals can apply starting April 10, 2020.

SBA Economic Injury Disaster Loans
The SBA’s Economic Injury Disaster Loan (EIDL) program gets an honorable mention here since the CARES Act temporarily expands eligibility to all businesses with 500 employees or fewer. The program offers up to $2 million in economic aid to small businesses, at an interest rate of 4% or less. Loans smaller than $200,000 can now be approved without a personal guarantee. In addition, the CARES Act removes the requirement that borrowers must demonstrate they have not been able to secure credit elsewhere.

Companies can also request an emergency grant cash advance of up to $10,000, to be funded within three days of the SBA’s receipt of the loan application. The grant does not need to be repaid, even if the candidate isn’t ultimately approved for a loan.

Manufacturers can apply for loans under both SBA programs as long as they don’t cover the same expenses.

You can apply directly for an EIDL loan via the SBA’s online portal.

Midsized & Larger Businesses – $500B
The Treasury will have $500 billion at its disposal to give loans to eligible businesses as part of the economic stabilization plan included in the CARES Act. The $500 billion will be allocated as follows:

The terms and conditions of these loans are delineated between the $46 billion for air carriers and businesses deemed critical to national security, and the $454 billion allocated for other businesses, states and municipalities. The former will be provided directly via the Secretary of the Treasury, while the latter will be allocated via programs and facilities established by the Board of Governors of the Federal Reserve program—which means requirements relating to loan collateralization, taxpayer protection and borrower solvency under the Federal Reserve Act also apply. The process to get a loan will also likely be lengthier, as these programs and facilities have not yet been established.

The $454 billion does explicitly include a loan program for midsized businesses—defined as organizations with between 500 and 10,000 employees, for which annualized interest rates cannot exceed 2%. No interest payments are due within the first six months of the loan.

It’s worth noting that the Department of Homeland Security cites “critical manufacturing” as one of 16 critical industry sectors vital to U.S. national security, in addition to the chemical sector and defense industrial base. As a result, many manufacturers may be eligible for the $17 billion allocated for national security businesses.

Unlike the SBA Paycheck Protection Program, these loans are not forgivable. The loans also come with public disclosure requirements, which will be overseen by a Special Inspector General for Pandemic Recovery appointed by the President.

Tax Provisions

The CARES Act also introduces several tax changes, including credits, payment delays and increases to interest deductions that have immediate implications for manufacturers’ total tax liability:

  • Employee Retention Credit for Employers Subject to Closure due to COVID-19 – This tax credit against applicable employment taxes amounts to 50% of “qualified wages with respect to each employee.”
  • Delay of Payment of Employer Payroll Taxes – Employers may delay their 2020 payroll taxes, to be paid in full within two years.
  • Modification for Net Operating Losses – Tax losses from 2018-2020 can be applied retroactively five years to offset income.
  • Modifications of Limitation on Business Interest – Businesses may increase their interest deductions for 2019 and 2020. Previously, the maximum interest deduction was 30% EBITDA. It has been raised to 50% EBITDA. 

Labor Provisions

The most important labor provisions for manufacturers are those regarding paid leave and unemployment insurance. Under the CARES Act, there is a cap on the payments an employer must pay for emergency paid leave. Employers can also elect to receive an advance tax credit on paid leave. If they do not elect to receive the tax credit, they will be reimbursed on the back end.

Unemployment insurance is available to both the unemployed and the underemployed. State short-term compensation programs will make it possible for employers to preserve pro-rated unemployment benefits for employees when reducing their hours.
 

Industry Partnerships

$50 million is reserved for the Hollings Manufacturing Extension Partnership (MEP), for the purposes of helping manufacturers respond to COVID-19. MEP provides resources to small and medium-sized manufacturers.

$10 million is reserved for the National Network of Manufacturing Innovation (also known as “Manufacturing USA”), for the purposes of helping manufacturers respond to COVID-19. They engage over 1,900 member organizations.
 

Medical Device and Biopharmaceutical Manufacturers

There are special provisions of the CARES Act intended for businesses and workers involved in the biopharmaceutical and medical device production industries.

Biopharmaceutical and medical device manufacturers will need to be aware of new rules and regulations set forth by the CARES Act, some of which include:

  • Compliance with the medical supply chain security report. The National Academies of Sciences, Engineering, and Medicine will be carrying out a report on the security of the U.S. medical supply chain, considering issues of national security and the potential for increasing domestic manufacturing of certain medical supplies. As part of the report, the National Academies may consult with medical product manufacturers. Manufacturers should be prepared to comply with the report and watch for its findings once released.
  • Ensure compliance with new manufacturing reporting requirements related to drug shortages. The responsibilities for manufacturers to report on drug shortages has been expanded. For example, manufacturers will now be required to maintain and implement a risk management plan and prepare annual reports for each drug they produce as listed in the Federal Food, Drug, and Cosmetic Act.
  • Notification of discontinuance or interruption of medical device manufacturing. Devices that could have an impact on public health and safety during a public health crisis must be more closely monitored. Manufacturers are now responsible for reporting supply chain disruptions and discontinuations.

Provisions to Increase Supply of Products to Help Fight COVID-19

Certain supplies, specifically hand sanitizer, PPE and cleaning products, are useful in combating the spread of COVID-19. The U.S. is currently suffering from a shortage of many such supplies. The CARES Act includes provisions intended to increase the availability of these products to protect public health.

  • Alcohol – There will be a temporary exception from excise tax for any alcohol that is used to produce hand sanitizer.
  • PPE and Hand Sanitizer – Many of the funds being made available to various institutions, including the Smithsonian Institutes and the TSA, can be used for the purchase of PPE, hand sanitizer, and cleaning products. The demand for these products, while high already, will likely continue to grow as government assistance becomes available for their purchase.

Takeaways

  • Manufacturers should now assess the need for financial relief that is being provided through this $2 trillion CARES Act. There are several very favorable loan options and tax savings strategies that manufacturers of all sizes can benefit from. The underlying theme with these loans and tax benefits is to maintain employee levels so be sure to understand these options before making decisions to reduce headcount.
  • For manufacturers who are able to keep facilities open, either by pivoting production or being classified as essential, employee health and safety must come first. Asking employees to take their temperature multiple times a day, to avoid interacting with other teams and to restrict themselves to their own workspace, and ensuring they know they won’t be penalized for taking time off in light of a potential exposure, are all important steps employers can take to reduce the likelihood of COVID-19 spreading through their facilities.
  • Manufacturers may consider pivoting their production to high-demand items like hand sanitizer or medical devices, which can help alleviate severe shortages of products necessary to fight COVID-19 and keep their operations running. Some manufacturers, such as perfume and alcohol manufacturers, may already have supplies and equipment necessary to produce hand sanitizer. If you are considering pivoting your production, there are several questions you should be asking yourself first. Do you have the necessary expertise to produce the new product, or will you need to hire new workers with specialized knowledge? Are you aware of any new restrictions and/or regulations that you’d be subject to if you produce this new product? Do you have access to the resources necessary to produce this product?
  • Biopharmaceutical manufacturers should increase visibility in their supply chains to comply with new supply chain regulations in the CARES Act. Does your supply chain have blind spots? If so, several technological tools are available to help. Smart logistics, Cloud-based GPS, and Radio Frequency Identification technologies (RFID) are just a few tools that manufacturers can use to shed light on the hidden parts of the supply chain, hopefully reducing the likelihood of unwelcome surprises.

Nonprofits and Higher Education: How Does The CARES Act Help?

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By Andrea Wilson

Nonprofit organizations and higher education institutions have been hard at work trying to help the world navigate the novel coronavirus (COVID-19) pandemic.  While trying to maintain focus on their missions, these organizations and institutions face massive uncertainty in the face of COVID-19, including financial turmoil, layoffs, remote work, quarantines, shelter-in-place orders and other measures.

While the programs and initiatives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act are primarily intended to assist businesses, there are many programs that nonprofits and higher education institutions can benefit from. As nonprofits and institutions grapple with both the increasing need for services and prolonged economic instability, the CARES Act provides some reprieve.

It is important for nonprofits and higher education institutions to note that federal agencies are working to develop guidance around how specific provisions of the CARES Act will work in practice. The Small Business Administration (SBA), for example, has up to 15 days following the enactment of the CARES Act to issue regulations. Issuance of regulations and guidance may delay loan approval and disbursement or modify/waive certain loan requirements.
 

Nonprofit Eligibility for Small Business Disaster Loans

The CARES Act authorized two SBA disaster loan programs—The Paycheck Protection Program (PPP) and the Emergency Economic Injury Disaster Loans (EIDL) program. The PPP program is limited in scope to 501(c)(3) and 501(c)(19) non-profit organizations, while all non-profit organizations are eligible for the emergency EIDL program. Since the COVID-19 EIDL program was approved by the national emergency declaration back on March 13, many nonprofits and higher education institutions have likely already applied for one of these loans. While organizations may be worried this will jeopardize their eligibility under the PPP, both loans are permitted. Organizations may receive an EIDL and loans under other programs, such as the PPP, if the basis for the loans and/or costs being paid with each loan are different. For example, you can’t use both the EIDL and PPP for payroll. In other words, no double dipping or duplicating the benefit.
 

Paycheck Protection Program

This $349 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.
 
Who can qualify?
Registered 501(c)(3) charities, 501(c)(19) veterans organizations, and tribal business concerns that either: employ no more than 500 employees (including full-time and part-time workers), or have more than one physical location (with 500 or fewer employees per location) and are assigned a North American Industry Classification System (NAICS) code beginning with 72 may participate in the Paycheck Protection Program. Note that other nonprofit organizations are not eligible for the program. 

How much are the loans and what can they be used for?
The maximum amount for these loans is 2.5 times the average total monthly payroll costs for the prior 12-month period, or up to $10 million, with deferred loan payment of up to one year.  The loans may be used for the following:

  • Payroll costs
  • Employee compensation (excludes compensation in excess of $100,000 on an annual basis)
  • Continuation of healthcare benefits
  • Interest payments on mortgages entered into before February 15, 2020 (but not prepayment or payment of principal)
  • Rent for a lease entered into before February 15, 2020
  • Utilities, including electricity, gas, water, transportation, telephone, or internet
  • Interest on any debt incurred before February 15, 2020

Loans would be backed by a 100 percent federal guarantee through December 31, 2020, at which time the guarantee percentage would revert to the standard Section 7(a) loan guarantee.

How do you apply?
The application is available through the Treasury Department website. You will need to complete the PPP loan application and include your payroll information. Once complete, organizations need to submit to an approved lender by June 30, 2020. Although the program is open until the end of June, we encourage you to apply as quickly as you can, as it takes time for lenders to process the loan, and there is an overall funding cap.
 
When can you apply?

  • Starting April 3, 2020, nonprofits, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.

What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:

  • The loan is needed to support ongoing operations during the COVID-19 emergency.
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • You have not and will not receive another loan under this program.
  • All the information you provided is true and accurate.

Is there loan forgiveness?
Yes, if you meet certain conditions. The SBA will grant forgiveness up to the total amount borrowers spent of up to eight weeks of payroll costs and mortgage interest, rent, and utility payments between February 15 and June 30, 2020 if the borrower retains its employees and salary levels.  Loan forgiveness is prorated for organizations who do not maintain payroll.  The CARES Act provides an exception to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020.  Forgiven amounts do not need to be reported as taxable income. The Treasury Department is anticipating that not more than 25 percent of the forgiven amount may be for non-payroll costs.

Expanded Economic Injury Disaster Loan and Loan Advance

The CARES Act provides $10 billion for the Economic Injury Disaster Loan (EIDL) Program under Section 7(b) of the Small Business Act. The CARES Act made several changes to the EIDL program, which is available to nonprofits and businesses of all sizes in a declared disaster area. Currently, all 50 states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands have all been declared disaster areas for purposes of the EIDL Program. These loans are processed directly through the SBA.

How much are the loans and what can they be used for?
EIDL funds are available for a maximum amount of $2 million, carry an interest rate of 3.75 percent, and have a maximum term of 30 years. Loans over $200,000 must be guaranteed by any owner having a 20 percent or greater interest in the applicant. However, the CARES Act removed the requirement for personal guarantees on loans under $200,000.

Who can qualify?
The CARES Act expands eligibility for EIDL to include tribal businesses, cooperatives, and employee stock ownership plans (ESOPs) with fewer than 500 employees, or any individual operating as a sole proprietor or independent contractor between January 31, 2020 and December 31, 2020. Private nonprofits are also eligible for EIDLs. Until December 31, 2020, the SBA can approve EIDLs based solely on an applicant’s credit score or an alternative appropriate method for determining an applicant’s ability to repay.

How do you apply?
To apply for a COVID-19 Economic Injury Disaster Loan, click here.

When can you apply?
You can apply for these loans now. To speed up the process, an applicant may request an expedited disbursement that is to be paid within three days of the request. The advance may not exceed $10,000 and must be used for authorized costs but is otherwise not repayable if the EIDL is not approved.

What is required to be eligible?
Thanks to the CARES Act, a borrower no longer is required to be turned down for credit elsewhere, which often delayed the EIDL process. Additionally, the CARES Act waived the requirement that businesses be in operation for one year prior to the disaster. Removal of these requirements will expedite the loan process to get SBA disaster dollars into the hands of nonprofits and higher education institutions more quickly.

Is there loan forgiveness?
No.

Department of Treasury Assistance for Nonprofits and Higher Education

Exchange Stabilization Fund (Mid-Size Loan Program)
The CARES Act provides $454 billion as loans, loan guarantees, and investments for eligible businesses, states, and municipalities. Within the $454 billion, it was Congress’ intent that the Secretary of the Treasury make loans and investments available—to the extent practicable— to mid-size businesses and nonprofits.

Who is eligible?
It is important to note that unlike the PPP, these funds are available to all nonprofit organizations and not limited to 501(c)(3)s. These loans should be at a rate not higher than two percent annualized with no payments for the first six months.

What is required to apply?
If your nonprofit organization would like to benefit from this loan, you must provide a Good-Faith Certification that:

  • Economic uncertainty requires those terms;
  • Funds received will be used to retain 90 percent of the workforce at full compensation and benefit levels before Sept. 30, 2020;
  • An intent to restore not less than 90 percent of the workforce prior to Feb. 1, 2020 while restoring all compensation and benefit levels to workers no later than four months after their termination date; and
  • Certify that your organization will not outsource or offshore jobs for the term of the loan or two years after completing repayment of the loan; and
  • Certify that they will not abrogate collective bargaining rights during this time and will remain neutral in a union organizing effort for the term of the loan.

We expect these loans to be highly competitive, so we would encourage nonprofits to begin preparing now by collecting the necessary documents and completing applications as soon as possible.
 

Employment Provisions

Organization may be faced with difficult decisions in response to this unprecedented pandemic, including weighing whether to continue to pay workers or make the difficult decision to furlough your employees so they are able to file for unemployment benefits. The employment provisions in the CARES Act are to support employees who lose their jobs due to COVID-19.

Unemployment Reimbursements
All 501(c)(3) organizations have the option of paying unemployment insurance tax or self-insuring. The CARES Act reimburses 501(c)(3) organizations for half of their costs of unemployment benefits provided to laid-off employees. For charities that are tax-exempt from unemployment laws, the organizations are not eligible to receive unemployment benefits. However, organizations can receive this benefit if they voluntarily choose to self-insure.

Unemployment Benefits
COVID-19 is having a significant impact on unemployment throughout the nation, and the nonprofit sector is not exempt. The CARES Act allows employers to claim a new credit against applicable employment taxes in an amount equal to 50 percent of the qualified wages paid after March 12, 2020, and before Jan. 1, 2021, with respect to certain employees, up to a maximum of $10,000 of wages per employee.

The Act includes a specific section related to nonprofit organizations, which allows organizations to be reimbursed for half of the costs incurred through the end of 2020 to pay unemployment benefits. For this credit, any employer that is a tax-exempt organization described in IRC Section 501(c), is deemed to be an eligible employer with respect to all its operations. However, if your organization receives a loan under the PPP (discussed above), then your organization will not be eligible for this credit.

The Act also provides an additional $600 per week payment to those receiving unemployment benefits under their respective state laws and Pandemic Unemployment Assistance participants for up to four months. In addition, the Act provides federal funding for thirteen weeks of additional unemployment benefits through the end of 2020.
 

Tax Provisions

Employee Retention Credit for Employers
The CARES Act provides a refundable payroll tax credit for 50 percent of wages paid to your employees during the COVID-19 crisis if your organization is eligible. Your nonprofit, 501(c) organization is eligible for a partially refundable employee retention credit if:

  • operations were fully or partially suspended, due to a COVID-19-related shut-down order, or
  • gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

For organizations with more than 100 full-time employees, wages will be considered “qualified” when they are paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For organizations with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Universal Charitable Deductions
The CARES Act also included a temporary universal charitable deduction. This deduction will allow all taxpayers, even those who do not currently itemize their deductions, to claim a charitable deduction for cash donations up to $300 through December 31, 2020.  Recent limitations on charitable donations by individuals were also suspended, for example the 60 percent adjusted gross income limitation. For corporations, the limitation of 10 percent of taxable income was increased to 25 percent.

Delay of Certain Payroll Tax Payments
The CARES Act allows for employers, including tax-exempt organizations, to delay the payment of employer payroll taxes for the 2020 tax year. Fifty percent of employer payroll taxes are due by December 31, 2021. The remaining fifty percent of the employer’s portion of the 2020 payroll tax is due December 31, 2022. However, if your organization receives loan forgiveness of an SBA loan, your organization will not be eligible for a delay.

Minimum Funding Rules for Certain Charities
The CARES Act modifies the minimum funding rules for pension plans sponsored by charitable organizations whose primary purpose is to provide medical care and assistance to mothers and children, to allow for more flexibility in the amount of required payments.

Our team is in the process of putting together an advisory on Frequently Asked Questions about these programs to provide additional clarity about how nonprofits can take advantage of these funds and new provisions. While it’s still difficult to predict the full extent of the impact of COVID-19, we are closely monitoring this rapidly evolving situation, offering guidance to help you through this time of uncertainty.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” blog (April 3, 2020). Copyright © 2020 BDO USA, LLP. All rights reserved. www.bdo.com