We have spent a great deal of time in recent weeks connecting with our clients and friends who oversee endowments and foundations, listening to their concerns and offering counsel as we all navigate this pandemic and its impact on our communities. Many of our clients feel an understandable tension, as the financial stress impacting their portfolios is occurring at the same moment when the needs of their constituencies are most urgent.
Despite the challenges we are all facing, we are inspired by the work that our nonprofit clients are doing and seek to be a partner, resource and friend during this period, offering relevant information and perspectives when possible that can aid our clients in pursuing their missions.
The recent passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is poised to impact nonprofit organizations through a variety of new tax provisions and government programs. We hope this summary of the CARES Act’s key provisions is helpful, and that it can serve as a starting point for conversations about how we can help our nonprofit clients to move forward.
The CARES Act establishes several new tax provisions that increase the tax benefits available for charitable giving—including a new tax benefit for charitable giving available to the millions of taxpayers that take the standard deduction.
- The Act allows taxpayers to take an above-the-line deduction for charitable cash contributions up to $300 for the 2020 tax year. This deduction is available for taxpayers who do not itemize their deductions, and will apply to all years moving forward.
- For taxpayers who itemize deductions, the CARES Act increases the charitable deduction amount for cash contributions to public charities. For individuals, the amount has been increased from 60% to 100% of adjusted gross income, and for corporations, from 10% to 25% of taxable income. It is important to note that this provision applies to cash contributions made to public charities, and will not apply to contributions made to private foundations or donor advised funds.
- Above the deductibility cap of 100% of AGI for individuals, additional contributions may be carried forward and deducted over the next five years. The same carryover period will apply to corporations exceeding their cap of 25% of taxable income. (Note that each partner or shareholder in a partnership or S Corporation must make carryover elections separately.)
Paycheck Protection Program (PPP) Loans
Qualifying businesses, nonprofits and veterans organizations may be eligible to receive loans under the Paycheck Protection Program. Nonprofits can receive a PPP loan if it does not employ more than 500 employees on a full-time, part-time or other basis, OR, if applicable, the standard maximum employee count for the nonprofit’s industry sector as established by the Small Business Administration (the lower of these two headcount numbers applies).
Loan proceeds received by nonprofit or veterans organizations can be used for certain payroll costs (including benefits), utilities, mortgage interest, and rent in force before February 15, 2020. If used appropriately, these organizations can have these loans forgiven for the 8-week period following the origination of the loan, if they retain their work force during that period. Specifically, their average headcount for the 8-week period of the loan must remain at or above a prior comparison period (either 2/15/19-6/30/19, or 1/1/20-2/15/20), and they must not reduce the pay of any employee by more than 25% vs. the prior calendar quarter. There will be no penalty for a reduction in employment or wages if previously laid-off employees are rehired and decreased wages are restored by June 30, 2020.
Payroll costs that can be covered by loans are limited to the first $100,000 of any individual employee's compensation. This restriction is intended to ensure that loan proceeds are used primarily to cover payroll costs for employees who are more vulnerable to the economic fallout of COVID-19.
Employee Retention Credit for Employer’s Share of Employment Taxes
The CARES Act sets out to provide cash relief from employers that retain employees during the COVID-19 pandemic.
The employee retention credit permits employers to claim a new credit against applicable employment taxes, in an amount equal to 50% of qualified wages paid between March 12, 2020 and January 1, 2021, up to a maximum credit per employee of $5,000. A credit is valid for any calendar quarter in which the employer's operations were suspended due to governmental orders limiting commerce, travel or group meetings due to COVID-19, or in which the employer had a significant decline in gross receipts as compared to the prior year's corresponding quarter. For employers with more than 100 full-time equivalent employees, this provision includes employees who were not working due to COVID-19 (including those not working due to full or partial suspension of operations due to a government “stay at home” or other order). For employers with 100 or fewer full-time equivalent employees, it includes all employees. (Note that employers who receives a Paycheck Protection Program loan are ineligible for the employee retention credit.)
Delay of Payment of Payroll Taxes
The CARES Act will also permit employers to delay payment of the employer portion of payroll taxes beginning March 27, 2020 through the remainder of 2020. Payment can then be made in equal halves at the end of 2021 and 2022. It is important to note that an organization that has received a PPP loan that was subsequently forgiven will not be eligible to delay payment of payroll taxes.
Required Minimum Distributions and Qualified Charitable Distributions
The CARES Act also eliminates required minimum distributions (“RMDs“) from retirement accounts for 2020. This may impact charities who frequently receive Qualified Charitable Distributions (“QCDs”) made by individuals who are required to take RMDs. Since RMDs are eliminated, there is less incentive to shift funds from a retirement account to a charity. That said, to the extent an individual wants to make a charitable gift, a QCD from a retirement account is still tax-advantaged. And although the minimum RMD age was raised to age 72 at the end of 2019, you can still make a QCD beginning at age 70½
The CARES Act creates an Education Stabilization Fund which appropriates amounts to several pools that will be used to prevent, prepare for, and respond to COVID-19. Separate pools are being established for K-12, higher education, and general use by state governors. Funds used for higher education may be used to defray expenses for institutions of higher education, including lost revenue, technology costs associated with a transition to distance education, faculty and staff training, and grants to students for food, housing, course materials, technology, healthcare, and childcare. The Act also relaxes rules for financial aid repayments, allows the use of supplemental educational grants for emergency aid, provides temporary relief for student loan borrowers, and allows greater flexibility for teachers who are unable to complete service obligations that came with prior received grants.
Food Inventory Contributions
The CARES Act increases the deduction limits for food inventory contributions from 15% to 25% of taxable income for both C corporations and non-C corporations. The IRS has provided guidelines in “Publication 526 (2019), Charitable Contributions” that layout certain conditions that must be met in order for a proper deduction to be taken. The conditions are as follows:
- You made a contribution of “apparently wholesome food” from your trade or business. “Apparently wholesome food” is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
- The food is to be used only for the care of the ill, the needy, or infants.
- The use of the food is related to the organization's exempt purpose or function.
- The organization doesn't transfer the food for money, other property, or services.
- You receive a written statement from the organization stating it will comply with requirements (2), (3), and (4).
- The organization is not a private non-operating foundation.
- The food satisfies any applicable requirements of the Federal Food, Drug, and Cosmetic Act and regulations on the date of transfer and for the previous 180 days.
Several provisions in the CARES Act—especially those that create new programs under the auspices of various federal agencies—are still in a conceptual state, and it will take time for these to fully take shape. We will continue to monitor developments related to the CARES Act and its many provisions, and we will inform and update clients accordingly in the weeks and months ahead.
Please do not hesitate to get in touch with us (Amy Seto: [email protected]), Brigid Peterson ([email protected]) to discuss how the CARES Act may impact your nonprofit organization, or to talk about any of your concerns.
The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.
Any business or tax discussion contained in this communication is not intended as a thorough, in-depth analysis of specific issues. Brown Advisory does not render legal or tax advice. Prior to making an investment decision, a prospective investor should consult with their own legal, tax, accounting and other advisors to determine the potential benefits, burdens, and other consequences of such investment.
The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.