The nonprofit sector employs more than 12 million people and is the third-largest industry‡ in the country.
Fortunately, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law. This $2.2 trillion stimulus bill—the largest federal relief package in history—was enacted to give much-needed emergency relief to Americans and businesses, and some of the CARES Act’s provisions benefit nonprofit organizations.
Below are some tips for nonprofits during this time
- Prepare your board of directors about the current economic situation. With added volatility, be cautious about trying to time the market. It is near impossible to determine the bottom of a market, and it is equally difficult to time when to reinvest and catch the market before it significantly appreciates.
- If available, consider raising enough cash in your investment portfolio to cover distributions and expenses of your organization for several weeks and possibly months.
- Recognize that long-term investments go through periods of extreme volatility. Maintain a strong discipline and try not to overreact to daily swings in the market.
- Seek expert advice from industry professionals.
- Do your best to follow federal and state healthcare guidelines, including having your employees and staff work remotely if possible, and enforcing travel restrictions.
- Regularly communicate with your employees and your board of directors
- Reschedule future fundraising events or hold them virtually in order to avoid large gatherings.
- Communicate with your donors. Don’t be afraid to share your concerns and ask for support.
- Continue to monitor federal and state developments.
Despite these challenging times for nonprofits, we frequently hear stories of how these organizations are directly helping those who have been physically, mentally, and economically harmed by the coronavirus. The CARES Act will help many nonprofits continue to carry out their tax-exempt, charitable purposes and help those in need.
New $300 above-the-line deduction available for charitable contributions
The CARES Act encourages Americans to donate to charities by allowing nonitemizing taxpayers to take an above-the-line deduction in 2020 of up to $300 for cash contributions to most 501(c)(3) public charities. These charities are highly regulated and tax-exempt. Taxpayers will be able to claim these deductions on their 2020 tax returns.
Increase in total charitable deductions for cash contributions made in 2020
Prior to the CARES Act, an individual’s deduction for cash contributions to a 501(c)(3) public charity was generally limited to 60% of his or her adjusted gross income. The CARES Act lifts this limitation for a taxpayer’s qualified contributions. Qualified contributions are defined as cash contributions made by the taxpayer during the 2020 calendar year to most 501(c)(3) public charities. Taxpayers making qualified contributions will be entitled to deduct these contributions up to an amount equal to 100% of the individual’s adjusted gross income.
The CARES Act also provides for a higher deduction for qualified contributions made by C Corporations. A C Corporation’s charitable contribution deduction was previously limited to 10% of the corporation’s taxable income. Now, a C Corporation will be entitled to deduct qualified contributions up to 25% of its taxable income.
A taxpayer making qualified contributions in excess of the amount that the taxpayer is allowed to deduct may carry over the excess contributions to succeeding taxable years, subject to the general charitable contribution carryforward limitations. Your banker and tax advisor can help you understand the relief measures.
Loans under Paycheck Protection Program
The CARES Act provides $349 billion for small businesses through federally backed loans under the Paycheck Protection Program, which is an expanded Small Business Administration (SBA) 7(a) loan guaranty program. This program is designed to make funds available to qualifying businesses through banks and other lenders. Generally, SBA programs are limited to for-profit entities. However, the Paycheck Protection Program considers 501(c)(3) nonprofit organizations as eligible businesses. The CARES Act also considers 501(c)(19) qualifying veterans’ organizations as eligible for the Paycheck Protection Program.
Under the Paycheck Protection Program, 501(c)(3) organizations and 501(c)(19) organizations with 500 or fewer employees can borrow 2.5 times of monthly payroll expense, up to $10 million. These funds can be used to cover qualifying payroll costs, rents, utilities, and interest on mortgage and debt obligations. Qualifying payroll costs include salaries, vacation, family leave, healthcare benefits, and retirement benefits. Funds cannot be used for compensation in excess of an annual $100,000 salary for individuals or wages already covered under the Families First Coronavirus Response Act.
It should be noted that emergency financial relief for other types of nonprofits, such as 501(c)(4) social welfare organizations and 501(c)(6) business leagues, is available under a separate section of the CARES Act addressing emergency Economic Injury Disaster Loan (EIDL) grants.
Loan repayment and loan forgiveness
Unlike typical SBA 7(a) loans, a 501(c)(3) organization does not need to give a personal guarantee to receive funds, it does not need to pledge collateral, and it is not required to show that it cannot obtain credit elsewhere. A charitable organization is required to make certain certifications, including that the loan is necessary because of the uncertainty of current economic conditions. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived. Additionally, the SBA has no recourse against any individual, shareholder, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
Under the CARES Act, 501(c)(3) organizations are eligible for loan forgiveness for eight weeks. The amount of loan forgiveness may be reduced if the organization lowers the number of employees as compared to the prior year, or the employer reduces pay for any employee by greater than 25% as of the last calendar quarter. Organizations that re-hire workers previously laid off because of the coronavirus crisis will not be penalized for having a lower payroll for the beginning of the relevant period.
Organizations must apply to their lender for loan forgiveness and will receive a decision within 60 days. If a balance remains after the organization receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.
The CARES Act includes a section allowing some nonprofit organizations to be reimbursed for half of costs incurred through the end of the 2020 calendar year to pay unemployment benefits, including self-funding employment benefits.
For more information about managing investments for your nonprofit or institution, visit UMB’s institutional investment management on umb.com.
This post is informational only and does not constitute legal or tax advice. For all the items discussed in this post, it is best to consult your own legal or tax advisor who knows your specific situation and can advise you accordingly.
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