COVID-19 Update #5 - The Paycheck Protection Program - SBA Loans Available to Nonprofit Organizations

Special Note:  Guidance and information has been issued from several sources over the past week.  In an attempt to provide accurate information, this blog post is updated as guidance is issued.  This blog was last updated on 4/7/2020 and includes information contained in the SBA Frequently Asked Questions (FAQs) issued on April 6, 2020 . 

On March 27, 2020, President Trump signed a second piece of legislation, the Corona Aid, Relief, and Economic Security Act (the  CARES Act) geared to keep the economy running during the COVID-19 pandemic.  One of the most popular provisions in the legislation is the provision to provide businesses and nonprofits operational loans to assist during this time in keeping employees gainfully employed until the crisis has passed. This provision is known as the paycheck protection program.

Source of the Loan

The loans are financed through the U.S. Small Business Administration (SBA).  While typically nonprofit organizations and churches are not eligible for SBA loans, the CARES Act allows 501(c)(3) organizations, including churches, to apply for this program.  Congress has allocated $349,000,000,000 for the program.

Eligible Organizations

Virtually any small business and/or nonprofit organization with less than 500 employees will qualify or that meet one of the other definitions of a "small business enterprise" as defined by the SBA.  However, for nonprofit organizations this appears to be a straight up count of employees, both full-time or part-time.  Also, business operations that are independent contractors or sole proprietors may qualify for the loan. Nonprofit organizations may require an organization's determination letter as proof of exemption under 501(c)(3).  A determination letter is issued to each nonprofit entity when the IRS approves its exempt status.

The organization must have been in operation on February 15, 2020 and had employees at that date. Additionally, the organization must be prepared to state the loan request is due to economic uncertainty due to the current COVID-19 pandemic.

Special Note for Churches:  Churches exempt under a group ruling issued to a denomination should obtain a letter verifying they are a part of the group ruling and the determination letter issued to the group verifying its exempt status.  Churches that have never officially requested IRS recognition of their exempt status and do not belong to a group, may encounter hurdles in verifying their status as a 501(c)(3) organization.  However in a set of "frequently asked questions" issued on April 3, 2020, the SBA clarified that churches do not have to formally apply for exempt status.  Additionally, after much confusion occurred in the lending community, the SBA clarified that churches do qualify for the PPP assistance and the SBA's nondiscrimination requirements cannot be applied to a church's religious activities.  

Loan Availability

Loans will be available through this program until the earlier of June 30, 2020 or the funds allocated by Congress are utilized.  Therefore, early application will assist an organization in securing the loan.  The loans may bear an interest rate not to exceed 4%.  The SBA has announced that the loan's rate of interest will be 1%.  Additionally, lenders are instructed to defer any required loan payments for six months to one year with a potential for all or most of the loan to be forgiven.   

Potential Funds Available

The maximum loan available through this program is 2.5 times the amount of the organization's average monthly payroll costs for the one-year period preceding the date of the loan not to exceed $10 million.  (Special rules may apply for organizations in existence for less than 1 year or with seasonal employees.)  The SBA has clarified that an employer may use the past 12 months or the calendar year 2019 for determining the potential loan amount.  If the 2019 calendar year is used to determine the amount, the employer must also confirm that it had employees at 2/15/20. Therefore, a payroll run covering that time period may also be requested. 

Payroll costs include:

• Salaries and other wages

• Employer-paid health care benefits

• Employer-paid retirement benefits

• Employer-paid state and local payroll taxes

Payroll costs do not include: 

• The amount of cash compensation exceeding $100,000 per any employee (clarified by the SBA FAQs issued 4/6/20.)
• Compensation paid to an employee residing outside the U.S.

• Federal payroll taxes - While the law indicates this includes any taxes withheld from the employee for FICA/Medicare and Federal Income Tax as well as the employer portion of the FICA/Medicare taxes assessed and withheld for the period 2/15/20 to 6/30/20, the SBA states in its FAQs that there would not be a reduction in payroll costs for any taxes withheld from the employee, but the employer share of FICA/Medicare should never be included in the calculation.  

• Any compensation paid under the Families First Coronavirus Response Act for sick leave or family leave (see other related blog posts.)
• For an employer, payroll costs do not include amounts paid to independent contractors reported on Forms 1099-Misc.  This is excluded because these individuals/businesses may apply for the loan on their own. (Clarified by the SBA in FAQs issued on 4/2/20.)

Potential Use of Funds

Funds from the loan may be used for: 

• Payroll Costs as previously defined

• Mortgage interest

• Interest on other debt obligations incurred before February 15, 2020

• Rent

• Utilities

Potential Loan Forgiveness

Entities receiving these loans may qualify for all or a portion of the loan to be forgiven.  The amount to be forgiven is based on the amount spent on the following expenses for the period of eight weeks beginning with the date of the loan. 

• Payroll costs

• Mortgage interest payments for loans incurred before February 15, 2020

• Rent for lease agreements in force at February 15, 2020

• Utilities that were obligations as of February 15, 2020

Since the purpose of the provision is to keep people working, the amount of the loan forgiven is directly tied to the accomplishment of this purpose.  Therefore, the amount of the loan forgiveness is reduced if the recipient reduces its workforce either in numbers of employees or in the amount of salaries paid is significantly reduced.  

The amount forgiven is limited to the principal of the loan and accrued interest.  Additionally, only 25% of the amount of the loan can be justified with non-payroll costs; i.e., rent, utilities, etc.  The forgiven portion of the loan is not  taxable.  

Any portion of the loan that is not forgiven must be repaid within 2 years (the Act states up to 10, but the guidance indicates the loans are 2 year loans.)

SBA Guidance

Guidance from the SBA was issued on 4/2/2020 and can be located at https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf.

Application can be located at https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf

Frequently Asked Questions (FAQs) related to faith-based organizations applying for the PPP and the EIDL can be located at https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl

Alternate Loan Program

Secular nonprofit organizations may also explore the Economic Injury Disaster Loan (EIDL) provided for in earlier legislation.  This program may also provide funding for operations but it does not include any loan forgiveness provisions.  However, once an organization has applied for this program, it may be eligible for an immediate grant of up to $10,000 in addition to its loan.  Organizations who have previously received an EIDL may be eligible to roll it into the Paycheck Protection Loan. 

COVID-19 Update #4 - Emergency Family Leave Provisions and Related Tax Credits

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes several tax credits as well as mandated leave requirements.  To assist with application of the provisions, the various provisions are discussed in separate blog posts.  

Required Paid Family Leave for Employees

In addition to the required sick leave employers must offer, the Act also added some emergency provisions to the Family Medical Leave Act of 1993 (FMLA).  The effective date of these provisions is April 1, 2020.

Applicable Employers:  While the FMLA does not generally apply to employers with less than 50 employees, the emergency provisions have changed the applicable definitions of "employer" to address the current circumstances.  The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). 

Required Leave Circumstances:  The leave generally is available when an employee must take off to care for the employee's child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place or (2) makes a childcare provider unavailable.   Note:  the act specifically indicates an employee's son and/or daughter.  This does not extend to care of others at this time.  Therefore, it would not extend to employees who need to care for their grandchildren.  

Amount of Required Leave:  This amount of paid leave is more extensive than the other required sick leave provisions.  (Generally, the first 10 days of leave can be unpaid.  If qualifying, these leave days may have to be considered under the required sick leave provisions of this legislation.  For more information on the required sick leave, see Update #2.)  After 10 days, then paid leave is required, pegged to the employee's pay rate and pay hours. The paid leave rate must be at least 2/3 of the employees regular pay, but it may be capped at  $200 per day and $10,000 in the aggregate per employee.  

For part-time or irregular work schedules, the amount of paid leave is calculated based on the average number of hours the employee was scheduled to work per day for the last six months prior to the date the leave starts. 

Eligible Employee:  An eligible employee is an employee who has been employed for 30 days.  If an employee was laid off after March 1, 2020 and has been rehired, he/she must have been employed for 30 out of the last 60 days prior to the lay off.  

Taxation of Wages:  The required leave payments are taxable, but the compensation is not subject to the employer's portion of OASDI (Social Security tax of 6.2%)

Corresponding Tax Credits for Paid Family Leave

Tax Credits for Employers

Calculating the Credit:  The credit consists of the amount of:

1. The wages paid for the family leave (see note below) subject to the above discussed limits; and 
2. The amount of the cost of maintaining a health plan that is allocable to the paid leave time.

In addition to the base calculation for the credit, an employer is also eligible for a credit on the employer's portion of the Medicare taxes paid on the family leave wages paid. 

Nuance for churches and ministers:  The definition of wages eligible for the credit is defined by IRC Section 3121(a).  Wages paid to ministers performing ministerial duties and to employees of churches that have elected out of the FICA/Medicare system are not wages for purposes of IRC Section 3121(a).  Therefore, the wages paid to ministers and to employees of "electing" churches are not eligible for the credit.  Unless guidance is issued to the contrary, these individuals will need to look to the provisions for self-employed taxpayers to claim the credits.  See the discussion below on self-employed taxpayers claiming a family leave credit. 

Claiming the Credit:  The tax credit corresponding with the EFMLEA mandate is a credit against the employer's 6.2% portion of the Social Security (OASDI) payroll tax.  In the event the credit is more than an employer's OASDI, then the amount is refundable.  

Note:  While guidance as to how to claim the credit is still forth coming, right now we are anticipating the credit being claimed on an employer's Form 941.  

Family Leave Credit for Self-Employed Taxpayers

The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed in a separate blog post.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  As noted above, this should also apply to ministers and to employees of churches electing out of the FICA/Medicare program.  

Limit on the Credit:  The allowable credit is limited to the lesser of either 67% of the average daily self-employment income for the days attributable to family leave or $200 per day.   Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  

Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Technical guidance from the IRS and the DOL is forthcoming and the above interpretation of the law is subject to change based on newly issued guidance. FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.

COVID-19 Update #3 - Families First Coronavirus Response Act - Sick Leave Tax Credits for the Self-Employed

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. While the Act requires mandated paid sick leave in certain instances (covered in a separate blog post), the Act also provides limited relief for taxpayers who are self-employed.  

Tax Credit for Sick Leave 

The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  

Warning:  An unusual nuance is the law's application to ministers and employees who work for churches making the election under IRC Section 3121(w).  Income earned by ministers is taxed under IRC Section 1402 as self-employment income as is income paid to all employees that work for a church electing out of the FICA/Medicare system.  Therefore, these employees, even if provided with required sick leave by an employer, must claim the credit on their personal tax returns.  The employers will not be eligible to claim the credit.  At this time, guidance has not been issued by the IRS to confirm this interpretation.

Qualifying Time:  The taxpayer must have incurred days that he/she could not have performed their regular work duties for one of the following stated reasons: 

1. the taxpayer is subject to a Federal, State or local quarantine or isolation order related to COVID-19;
2. the taxpayer has been advised to self-quarantine due to COVID-19;
3. the taxpayer is experience symptom of COVID-19;
4. the taxpayer must care for an individual who is subject to a quarantine order; 
5. the taxpayer is caring for a son or daughter, if the child's school has been closed; or 
6. the taxpayer qualifies due to a subsequent factor defined by the Secretary of Health & Human Services.

Amount of the Credit:  The amount of the credit is either $511 per day, not to exceed 10 days, for the days qualifying under #1, #2 or #3 or $200 per day, not to exceed 10 days, for the days qualifying under #4, #5 or #6 above.  Accordingly, the self-employed person may receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. 

Limit on the Credit:  The allowable credit is limited to either 100% for days qualifying under #1, #2 or #3 or 67% for days qualifying under #4, #5 or #6, of the average daily self-employment income.  Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Please note that guidance on the legislation is being issued and may provide further clarification on the application and operation of the new law. 

Further analysis of COVID-19 relief legislation is discussed in separate blog posts.  

COVID-19 Update #2 - Families First Coronavirus Response Act - Mandated Paid Sick Leave

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses desiring to maintain employees in the wake of an inability to continue normal operations.  The Act includes several tax credits and a tax exemption that may be applicable to nonprofit organizations as well as for-profit organizations.   Since tax credits and employment obligations are combined into the legislation, it is difficult to determine how they stand alone and how they interplay with each other.  The goal of this post, and future posts, is to start sorting through the legislation creating understandable guidance specific to nonprofit organizations and churches. 

Note:  The following provisions are effective for wages paid starting April 1, 2020

Required Sick Leave 

Applicable Employers:  The Act act applies to private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons.  (An administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy may be claimed.  However, at this time there is no guidance on how this administrative exemption may be claimed or determined.) Applicable employers include nonprofits and churches.  Therefore, if your nonprofit organization or church employees more than 50 people, full-time or part-time, this law applies to you.  If you have less than 50 full-time and part-time employees, the law may apply to you unless you claim that adhering to the law will place your church or ministry in jeopardy.  Failure to comply with the required paid sick leave provisions is a violation of the Fair Labor Standards Act (FLSA) and subjects the offending employer to the penalties.

To assist in the analysis, the sick leave provisions have been split into two categories.

Required Sick Leave Category 1:  Employers are required to provide up to 80 hours of paid sick time to qualifying employees (see below for nuances applicable to churches) their regular rate of pay, not to exceed $511 per day ($5,110 overall limit).  The provision applies to employees are unable to work, or telework for the following reasons.  

1. the employee is subject to a Federal, State or local quarantine or isolation order related to COVID-19;
2. the employee's health care provided has advised them to self-quarantine; or 
3. the employee is experiencing symptoms of COVID-19 and seeking medical assistance. 

Required Sick Leave Category 2:  Employers are required to provide up to 80 hours of paid sick time to qualifying employees (see below for nuances applicable to churches) their regular rate of pay, not to exceed $200 per day ($2,000 overall limit).  The provision applies to employees who  are unable to work, or telework for the following reasons.  

1. the employee is caring for an individual who is subject to a Federal, State or local quarantine or isolation order or has been advised to self-quarantine; 
2. the employee is caring for a son or a daughter, if the school or the child-care provider has been closed or become unavailable due to COVID-19 (this is a fairly restrictive category and does not include grandchildren); or
3. the employee is affected by COVID-19 in some way specified by the Secretary of Health & Human Services in consultation with the Department of Labor (best interpretation: if the federal government comes up with another reason to let this provision apply, it may do so).

Nuances Applicable to Churches:  The definition of an employee for the above provisions is based on the definition of an employee for FLSA.  The courts have ruled that the FLSA does not apply to employees qualifying for the ministerial exception.  Therefore, a case may be made that the above mandated leave requirements do no apply to any church employees meeting the ministerial exception.  

Notice Requirements:  The law requires each employer to post a notice in a conspicuous place available to employees.  The DOL has issued a model notice that applies to both the sick leave discussed above and the additions to the Family Medical Leave Act to be discussed in a separate blog.  The model notice may be located at https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf

Benefits to the Employer

Available Credit Against Payroll Taxes:  Coupled with the above mandated sick leave requirements, Congress has granted a corresponding tax credit based on the above wages payments. The credit is based on:

1. Wages paid due to the required sick leave provisions.  Wages taken into account cannot exceed the above described wage limits of $511/$5,110 and $200/$2,000 per-employee.  (In the event an employer continues an employee's regular pay rate in excess of these limits, the excess is not eligible for the credit.) Warning for churches and religious organizations:  The definition of wages, for purposes of this credit, is defined by IRC Section 3121(a).  Wages paid to ministers and wages paid to employees of a church electing out of the FICA/Medicare program are not eligible wages; 
2. The amount of certain expenses incurred in connection with a qualified health plan if the expenses are excluded from employee income and are allocated to the employees' required sick leave wages; and 
3. The employer's portion of the Medicare tax paid on the applicable wages.

The credit is applied to the employer's share of OASDI taxes (Social Security tax of 6.2%) with any excess credit being refundable.  At this time, it is anticipated that the credit will be allowed on the Form 941.  However, in order to allow immediate access to the funds, the IRS has indicated that an employer may determine the amount of the credit and apply it against the employer's required payroll tax deposit for all taxes. 

Additionally, any wages paid as a result of required paid sick leave are not wages for purposes of the calculation of the OASDI taxes (Social Security tax of 6.2%).  

Practical Application:  Employers must determine the employees that may qualify for the required leave and discuss the arrangements with them.  Remember, the provisions don't apply if the employee is still performing services for the employer.  When the applicable wages are paid, the employer will need to be able to delineate these wages from any other wages paid.  As the wages are paid, a tentative calculation of the credit should be determined to allow for a proper reduction in payroll tax deposits.  

As originally stated, the required paid sick leave becomes available for applicable wages paid between April 1, 2020 and December 31, 2020. 

Please be aware that guidance is being issued on a regular basis and may provide further clarification on the above information.  FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions. 
Other provisions of the legislation will be covered in other blog posts. 

COVID-19 Update #1 - IRS Return Filing & Payment Obligations

At the writing of this post, life has taken a sharp turn from "normal" for everyone across the world.  Adjusting to COVID-19 requires most of us to adjust every facet of life from the way we work, to the way we shop, to the way we worship and the way we socialize.  This post is the first in a series that is geared to keep the nonprofit community up to date in the tax and accounting changes that may be affecting or will affect your organizations and employees in the coming days. 

Return Due Dates

All federal income tax returns due on April 15, 2020 have been automatically extended to July 15, 2020.  There is no need to file Form 4868 or Form 7004 to extend these returns.  This extension covers all individuals and corporations.  However, nonprofit organizations should note that it does not cover information returns.  Therefore, nonprofit organizations filing Form 990 must adhere to the original filing deadlines.  However, Form 990-T is an income tax return and it has been extended.  Additionally, for income tax returns applicable to fiscal years ending in 2019, if a return's original due date or extended due date is April 15, 2020, the due date is extended to July 15, 2020. 

Income Tax Payments

2019 payments of income taxes as well as first quarter federal estimated income tax payments have been extended to July 15, 2020. Please note:  the quarterly estimated tax payment due June 15, 2020 has not been extended.  (Although, one of my creative practitioner friends pointed out that you can make your first quarter estimated tax payment at July 15th large enough to cover the second quarter payment and technically, alleviate the need for a second quarter payment at June 15th.) 

Please see upcoming updates in this series regarding the various benefits provided through recent legislation.