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We are in unprecedented times, and many nonprofits are struggling to make ends meet. Between a steady stream of cancelled events and a depressed investment market that is making some donors hesitant to give, we hope to offer clarity regarding what options exist for nonprofits trying to stem the tide within the sea of new legislation.
New $300 Above-The-Line Deduction For Charitable Contributions
The CARES Act introduces a new above-the-line deduction (for non-itemizers which make up more than 90% of taxpayers) in the CARES Act for Charitable Contributions made to qualifying charities.
AGI Limit For Cash Charitable Contributions Temporarily Repealed
The CARES Act increases the AGI limit on cash contributions made directly to charities from a maximum of 60% of AGI, to 100% of AGI. As such, donors can completely wipe out their 2020 tax liability with charitable contributions.
Qualified Charitable Distributions Are Still A Tax Efficient Way To Give
The CARES Act suspended RMDs for 2020. One of the most tax efficient strategies has been to take advantage of the Qualified Charitable Distribution (QCD) by sending RMDs directly to charities to avoid reporting IRA distributions as income. Although RMDs have been waived for 2020, the QCD (up to $100,000 per year) is still available to IRA owners age 70.5 and older. The QCD in most cases is still the most efficient way to give to charity.
Action Plan: Inform your donors of the incentives to continue making donations.
To help small businesses and nonprofits maintain employees, The CARES Act has provisions for three programs:
A significant potential benefit included in The CARES Act for ‘small’ business owners and nonprofits is the Paycheck Protection Program, a (partially) forgivable loan program offered through the Small Business Administration (SBA). Such loans must be issued by June 30, 2020, and can have a maximum maturity of 10 years. They may be provided via existing approved SBA lenders, as well as lenders who are otherwise certified by the SBA to offer such loans. Furthermore, such loans will be 100% guaranteed by the SBA.
Qualifying For The Paycheck Protection Program
Businesses, including sole-proprietors and nonprofits, that have fewer than 500 employees (including affiliated businesses), or the employee size standard under NAICS Code, if larger, are eligible for this relief. (Food service businesses also apply if they employ fewer than 500 people per physical location.)
Under the Paycheck Protection Program, lenders will generally be able to issue 7(a) small business loans up to a maximum of the lessor of $10 million, or 2.5 times the average monthly payroll costs over the previous year (excluding annual compensation of amounts over $100,000 per person). For businesses and nonprofits who have seasonal employees (e.g., camps and conference centers) the calculation is based on the average monthly payroll from 2/15/19 to 6/30/19. And the proceeds of such loans may be used to pay a variety of costs, including:
Benefits of Loans Issued Under The Paycheck Protection Program
The single largest potential benefit of a loan issued under the Paycheck Protection Program is the possibility of having all, or a portion of the loan forgiven. The amount eligible to be forgiven is the amount spent, during the first 8 weeks after the loan is made, on:
In order for the above amounts to be forgiven the business must maintain the same number of employees (equivalents) from February 15, 2020, through June 30, 2020, as it did during either the same period in 2019, or from January 1, 2020, until February 15, 2020. To the extent this requirement is not met, the amount eligible for forgiveness will be reduced, ratably. Additional reductions in the amount to be forgiven will be incurred if employees with under $100,000 of compensation have their compensation cut by more than 25% as compared to the most recent quarter.
Any debt forgiven pursuant to this provision is not included in taxable income for the year. The maximum interest rate that can be charged for a loan made under this program is 4%. Payments for loans made under the Paycheck Protection Program will be deferred for a period of no less than six months, and no longer than one year. Additional guidance will be provided to lenders within 30 days of enactment to further elaborate on the six-to-12-month deferment period.
As an incentive to encourage businesses and nonprofits who have been hit hard by the economic effects of the COVID-19 crisis from making further layoffs, The CARES Act introduces a new payroll tax credit (provided they are not receiving a covered loan under section 7(a)(36) of the Small Business Act).
Qualifying for the Employee Retention Credit
The ‘trigger’ for a company to begin to be eligible for the credit is either that operations of the company have been fully or partially suspended during a quarter as a result of a governmental authority, or a quarter in which revenue in 2020 that has less than 50% of the revenue from the same quarter in 2019. As such, a business which is not at least partially suspended because of government restriction, and which never see its year-over-year quarterly revenues plummet below the 50% mark will not be eligible for the credit.
For those businesses and nonprofits that do meet this (unfortunate) requirement, the business will continue to qualify for the credit until the earlier of:
For businesses and nonprofits qualifying for the credit based on revenue, by virtue of the fact that at least one quarter’s revenue in 2020 must be more than 50% less than the revenue for the same quarter in 2019, a company experiencing a sustained substantial, but not-substantial-enough, decrease in revenue throughout the year, may never qualify for the credit.
Calculating the Employee Retention Credit
For planning purposes, it is important for employers to not only understand that they are eligible for a credit, but also to know how much of a credit they are eligible for, as this will help inform business decisions. In the simplest terms the credit is equal to 50% of wages paid to each employee, up to a maximum of $10,000 of wages per employee. There are, however, as usual, some important caveats to which business owners and nonprofits must be made aware.
Specifically, businesses and nonprofits with 100 or few employees count “wages” very differently from larger businesses. For small businesses (100 or fewer employees), all wages (up to the $10,000 maximum limit per employee) are eligible to count towards the credit. By contrast, for larger employers with more than 100 employees, only wages paid to individuals (up to the $10,000 maximum limit per employee) who are not providing services (not working) during a government shutdown, or because the businesses revenues have declined as outlined above, are eligible to count towards the credit. In both cases, wages include qualified health care expenses allocable to those wages.
The CARES Act provides employers with another payroll-related tax break. With the exception of employers who have debt forgiven by The CARES Act for certain loans provided by the Small Business Administration, employers are eligible to defer payroll taxes from the date of enactment, through the end of the year, until the end of 2021 and 2022.
More specifically, 50% of the payroll taxes that would otherwise be due during this period may be deferred until December 31, 2021. The remaining 50% is due on December 31, 2022.
If you go with option 1, options 2 and 3 are not available.
Action Plan: Determine which option gives you the most benefit (option 1 vs. options 2 and 3). If option 1 is the best for your organization, contact a lender. Lenders will most likely be your current banker. They will receive funding from the Small Business Administration. So, contact whoever you currently have your bank accounts with today, and see if they are participating in the Small Business Administration loans provided in The CARES Act.
Many businesses and nonprofits across the country are being forced to make difficult decisions about whether to continue paying some or all of their employees. Now is a good time to review the unemployment benefits available to your employees.
Nonprofits fall into one of three categories for the purposes of Unemployment Insurance (UI) laws:
Employees of nonprofits that pay SUTA or self-insure are generally eligible for UI benefits. However, employees of most faith-based nonprofits and small charitable organizations (fewer than four employees) generally can’t access UI benefits if they are laid off. However, they most likely can receive UI benefits under the Disaster Unemployment Assistance (DUA) program because of COVID-19. Most states, including Pennsylvania, have been granted Disaster status.
The CARES Act increases unemployment payments by $600 per week for four weeks and extends the benefit period by 13 weeks. Reimbursable employers will receive notification at the end of the year to exercise an option to elect relief from charges.
Action Plan: Look for notification at year end to exercise relief from charges.
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