The CARES Act Explained: Potential Benefits for both Donors and Nonprofits

In times of crisis in our community, philanthropy provides a beacon of hope. Arlingtonians are generously stepping up to donate food and supplies to safety-net organizations, to contribute much needed funding for emergency response, and to help stabilize vital non-profits that now find themselves facing an uncertain financial future.

The federal government’s stimulus package — known as the CARES Act (Coronavirus Aid, Relief and Economic Security Act) — includes provisions to further inspire and encourage charitable giving in these uncertain times, as well as provisions aimed at providing relief to nonprofits.

The following is a summary of CARES Act provisions that are likely to be of interest to donors and nonprofits. For a more detailed discussion of how the CARES Act might impact your giving or your nonprofit, contact Jennifer Owens at jowens@arlcf.org or 703 243-4785 ext. 201.

Donors: The CARES Act Creates Incentives for Charitable Giving

Non-Itemizers Are Eligible for a $300 Charitable Deduction

Ninety percent of taxpayers do not itemize on their federal income tax return. This provision allows a reduction in taxable income of up to $300 per taxpayer or $600 for a married couple. It applies to gifts to public charities and is not available for gifts to donor advised funds.

Adjusted Gross Income Deduction Limitation for Cash Gifts Raised to 100%

For the 2020 tax year, the limit on charitable deductions for cash gifts is raised from 60% of adjusted gross income (AGI) to 100%. A donor who makes charitable cash gifts equal to her AGI will pay no federal income tax in 2020! Ordinarily, the donor’s total deduction would be limited to 60% of AGI and the donor would have to carry forward the rest.

Note: The 100% election may not always be the most tax-wise choice. There are circumstances when it makes sense to carry forward part of the deduction in future years. Please contact your tax advisor or our office for assistance in analyzing the best option for you.

Required Minimum Distributions from IRAs Waived

Most people subject to a required minimum distribution from their retirement plans will not need to take a distribution from their plan in 2020. Even so, itemizers and non-itemizers can still take advantage of the tax efficient opportunity to make a qualified charitable distribution up to $100,000 from their IRA, completely avoiding income tax on the amount of the distribution.

Corporate Cash Contribution Limit and Limit on Businesses Contributing Food Inventory Increased to 25%

The taxable income limit applying to a corporation’s cash contributions is increased from 10% to 25% for 2020. Qualified cash gifts above the 25% limit can be carried forward for up to five years. The limitation on deductions for contributions of food inventory is increased from 15% to 25%.

Arlington Community Foundation is here to help donors who wish to better understand the community’s needs during the Covid-19 crisis and to work together with donors and their advisors the most tax-advantaged way to make charitable gifts.

Nonprofits:  CARES Act Offers Relief

As nonprofits carry out their vital missions in the community, they face challenges on multiple fronts. Many human services and medical organizations are experiencing unprecedented demand for their services. Arts, education, and environmental organizations are racing to adapt, forging new, though often imperfect, pathways for virtual mission delivery.

And all of this is occurring against the backdrop of revenue uncertainty. How will nonprofits fundraise when events and face to face meetings are not possible due to social distancing? How will the economic recession impact funders’ ability to give this year and in the years ahead?

Fortunately, the CARES Act offers some relief and stability for nonprofits in these uncertain times. There are several programs for which nonprofits are eligible.

Paycheck Protection Program

The CARES Act provides for $349 billion for small businesses and nonprofits through the federally backed, modified, and newly expanded Small Business Administration (SBA) 7(a) loan program. Under this program nonprofit organizations qualified under sections 501 (c)(3) or 501 (c)(19) (veteran’s organizations) with less than 500 employees can borrow up to 2.5 times their average monthly payroll costs as measured during the 12 months preceding the date of the loan.  Proceeds from the loan may be used for payroll and benefit expenses, mortgage interest, rent, utilities, and interest payments on debt incurred prior to February 15th of this year.

Key Features:

  • Regulations issued by the SBA stipulate that at least 75% of the loan proceeds must be used for payroll expenses.
  • Payroll costs for individual employees over $100,000 are not eligible.
  • Unlike traditional SBA loans, no personal guarantee, collateral, or demonstration that credit cannot be obtained elsewhere are required.
  • Loan has a maturity of two years and an interest rate of 1%
  • Payments are deferred for 6 months
  • Nonprofits are eligible for loan forgiveness for the amount spent on qualified expenses for 8 weeks beginning with the origination date of the loan. The amount of forgiveness will be reduced if there is a reduction in the number of employees compared to the prior year or if there is a reduction of over 25% for any individual employee’s compensation compared to the previous year.

Economic Injury Disaster Loan

In addition to the Paycheck Protection Program, the CARES Act bolsters the SBA’s Economic Injury and Disaster Loan (EDIL) program. Standard program requirements of a personal guarantee for loans up to $200,000, one full year of operation prior to the disaster, and an inability to obtain credit elsewhere are waived.

Unlike businesses and other nonprofit entities, 501 (c)(3) and 501 (c)(19) organizations are permitted to apply for EIDL grants in addition to a Paycheck Protection loan provided that the loans are not used for the same purpose.

Nonprofit borrowers may also seek a $10,000 emergency advance within three days after applying for an EIDL grant. Even if the application is denied, the applicant is not required to repay the $10,000 advance.

Employee Retention Payroll Tax Credits

The CARES Act creates a refundable payroll tax credit of up to $5,000 per employee pursuant eligibility requirements. In addition to being operational in calendar year 2020, the nonprofit must have fully or partially suspended operations during the calendar quarter because of orders from a government authority limiting operations due to COVID-19 or have at least a 50% reduction in revenue for the first quarter of 2020 compared to 2019. Nonprofits receiving emergency SBA Paycheck Protection Program loans are not eligible for payroll tax credits.

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