Relief Options For Non-501(C)(3) Exempt Organizations Under The Cares Act
By Israel Tannenbaum and Ethan Kahn
April 13, 2020
On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Phase 3 COVID-19 emergency relief bill aimed at providing much-needed assistance to individuals, small businesses and not-for-profit organizations.
Although many of the provisions of the CARES Act only apply to entities organized under sections 501(c)(3) and 501(c)(19) of the Code, emergency relief for other types of not-for-profits, such as 501(c)(4) social welfare organizations and 501(c)(6) trade associations, is available under different sections of the act, including emergency Economic Injury Disaster Loan (EIDL) grants, and Retention Payroll Tax Credits.
Eligibility and Requirements for Emergency EIDL Grants
Section 1110 of the CARES Act injects an additional $10 billion into the Small Business Administration’s (“SBA”) existing EIDL program, expands eligibility for EIDL loans, and waives certain requirements for applicants, which include private not-for-profit organizations with 500 or fewer employees. The EIDL loans are available during the period of January 31, 2020 through December 31, 2020.
EIDL loans go up to $2 million. Small businesses are subject to a 3.75% interest rate, while nonprofits have a 2.75% interest rate. Terms of the loan go up to 30 years, and principal and interest can generally be deferred for up to four years.
This section waives the standard EIDL program eligibility requirements that:
- The borrower provide a personal guarantee for loans up to $200,000;
- That the eligible not-for-profit be in operation for one year prior to the disaster (except that the not-for-profit must have been in operation on January 31, 2020); and
- That the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely on the basis of their credit score or “alternative appropriate methods to determine an applicant’s ability to repay.”
$10,000 Emergency Advance – EIDL Grant Program
For not-for-profit organizations seeking immediate funds, borrowers may receive a $10,000 emergency advance within three days after applying for an EIDL grant. If the application is denied, the applicant is not required to repay the $10,000 advance. Emergency advance funds can be used for payroll costs, increased material costs, rent or mortgage payments, or repaying obligations that cannot be met because of revenue losses.
Employee Retention Payroll Tax Credits
Section 2301 of the CARES Act creates a refundable payroll tax credit of up to $5,000 for each employee on the payroll when certain conditions are met. To be eligible, an entity must have carried on a trade or business during calendar year 2020, and satisfy one of the following two tests:
- Have business operations fully or partially suspended during the calendar quarter because of orders from a government authority limiting commerce, travel, or group meetings due to COVID-19; or,
- Have a reduction in revenue of at least 50% in the first quarter of 2020 compared to the first quarter of 2019.
For not-for-profit organizations, the entity’s entire operations must be taken into account when determining the decline in revenues.
Claiming the Credit
Eligible employers will report their total qualified wages and related credits for each calendar quarter on their federal employment returns (usually IRS Form 941, “Employer’s Quarterly Federal Tax Return”). Form 941 is used to report income and Social Security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of Social Security and Medicare tax.
Advancing the Credit
As noted in the FAQs put out by the IRS, because quarterly returns are not filed until after qualified wages are paid, some eligible employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund qualified wages. Following is a procedure established by the IRS for obtaining an advance of the credits:
- The eligible employer should first reduce its remaining federal employment tax deposits for wages paid in the same calendar quarter by the maximum allowable amount.
- If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the eligible employer can file Form 7200 to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.
- If the employer files Form 7200, it will need to reconcile this advance credit and its deposits on Form 941 (or other applicable federal employment tax return), and it may have an underpayment of federal employment taxes for the quarter.
- The eligible employer should not file Form 7200 if it fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified wages in excess of that amount.
For example: An eligible employer paid $20,000 in qualified wages to employees and is therefore entitled to a credit of $10,000. The employer is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all its employees, on wages paid during the same calendar quarter. Assume that the eligible employer has no paid sick or family leave credits. The eligible employer can keep the $8,000 of taxes that it was otherwise required to deposit without penalties as a portion of the credit it is otherwise entitled to claim on Form 941. The eligible employer may file Form 7200 requesting an advance credit for the remaining $2,000.
Although much of the CARES Act spotlight has been on the programs that are afforded to 501(c)(3) entities, there are some very beneficial options that can be utilized by all not-for-profit organizations during this difficult time.
Organizations should consider how they can maximize these programs. Mazars is well versed and uniquely experienced in navigating these provisions, and we are here to help should you have any questions.
For additional information regarding COVID-19 tax issues, please visit our dedicated resource center at www.mazarsusa.com/covid19