Tax News Update    Email this document    Print this document  

Over the past several weeks, Congress has passed, and the President has signed, a number of tax and stimulus packages in response to the novel coronavirus pandemic. This Tax Alert highlights several key sections of these stimulus efforts and how they can directly affect tax-exempt organizations.

Initial legislative efforts

On March 6, 2020 President Trump signed the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (H.R. 6074) approving $8.3 billion of additional Federal spending. On March 13, 2020, the President issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) in response to the ongoing novel coronavirus (COVID-19) pandemic. On March 18, the President signed the Families First Coronavirus Response Act (H.R. 6201), providing another $3.5 billion to state and federal agencies.

The Families First Coronavirus Response Act provides affected individuals with paid sick and family leave, creates tax credits for affected employers, expands food and nutrition services, allows for emergency state unemployment insurance grants, and increases Medicaid funding to states, among other things. See Tax Alerts 2020-0586 and 2020-0598. The Families First Act requires group health plans to provide full coverage for COVID-19 testing. In addition, the IRS and Treasury previously issued guidance (Notice 2020-15) allowing high-deductible health plans to voluntarily suspend deductibles for COVID-19 testing and treatment without causing covered individuals to lose their eligibility for health savings account contributions. See Tax Alert 2020-0543. Hospitals should determine how these requirements could impact their care and closely analyze their financial assistance and community benefit plans.

In Notice 2020-18, the IRS extended the April 15, 2020 due date for filing federal income tax returns to July 15, 2020. In addition, taxpayers now have until July 15, 2020, to pay their entire income tax liability without incurring penalties or interest. The notice removed the previously imposed caps on payment amounts that could be postponed. See Tax Alert 2020-0728.

The IRS has since released FAQs in response to Notice 2020-18. In listing the IRS forms to which the notice applied, the FAQs do not include the Form 990 series but does state that "with respect to Form 990-T, if that Form is due to be filed on April 15 [regardless if this is the original or extended due date], then it has been postponed to July 15 under the Notice. For taxpayers whose Form 990-T is due on May 15, that due date has not been postponed under the Notice." Therefore, Notice 2020-18 did not grant any extension of time to file returns for tax-exempt organizations with an original or extended due date of May 15, 2020 or for any fiscal-year tax-exempt organizations with original or extended due dates in June, July or August.

As President Trump has declared the novel coronavirus to be a qualified disaster under the Stafford Act, certain provisions of the Internal Revenue Code become relevant. In particular, IRC Section 139 allows tax-exempt organizations to take specific measures to help those directly impacted by the COVID-19 pandemic. Tax-exempt organizations, including employer-sponsored private foundations, may now make tax-free qualified disaster relief payments to employees of related organizations under IRC Section 139 without the imposition of self-dealing excise taxes or risk to their tax-exempt status. Additionally, tax-exempt organizations may now create a qualified disaster relief fund without the fund being designated as a donor-advised fund. See Tax Alerts 2020-0783 and 2020-0586.

In addition to these disaster relief provisions, tax-exempt organizations may wish to consider establishing employee leave-sharing and/or leave-based donation programs. Leave-sharing programs allow employees to donate some of their accrued leave for the benefit of other employees who need additional leave. Leave-based donation programs allow employees to forgo their accrued leave in exchange for cash donations that the employer makes to charitable organizations. The tax effects of each program vary and depend, in part, on whether the organization lies within a jurisdiction that has incurred a "major disaster" as declared by the President (this declaration differs from the one made under the Stafford Act). Indeed, some organizations may have facilities and employees in states that have been declared major disaster areas by the President and other states that have not sought or obtained such a declaration.

The CARES Act

Enacted on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes several opportunities that tax-exempt organizations should consider for the benefit of their employees and for tax-planning purposes. For a detailed discussion of the CARES Act, see Tax Alert 2020-0708.

Health Care provisions, including support for health care providers. Title I of the CARES Act includes several sections relating to emergency funds for health care providers and programs, as well as COVID-19-specific emergency-period health-planning provisions: $100 billion in reimbursements to hospitals and health care providers for COVID-19-related expenses and lost revenue; $16 billion for the Strategic National Stockpile; and $11 billion for vaccines, therapeutics, diagnostics and other medical or preparedness needs. The CARES Act provides specific guidance to address: supply and drug shortages; coverage of testing and vaccines for COVID-19 patients; Medicare add-on payments for inpatient COVID-19 patients; increased funding and flexibilities for telehealth; increased post-acute and home dialysis care flexibility; ready reserve corps and volunteer health professionals; drug innovation and development; Medicare durable medical equipment payments; and specific program extensions and reauthorizations.

Payroll tax deferral. Section 2302 of the CARES Act delays the payment of the employer's portion of Social Security taxes (6.2% of wages up to $137,700 for 2020) incurred from March 27, 2020 through December 31, 2020. Federal income tax withholding, Medicare, and the employee's portion of Social Security tax are not eligible for this deferral. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder is paid by December 31, 2022. The payroll tax deferral is not available to those obtaining a Small Business Act loan but can be used with the employee retention credit.

Employee-retention credit for employers subject to closure due to COVID-19. The law provides a refundable payroll tax credit (essentially the employer's portion of Social Security taxes) equal to 50% of wages paid by employers to employees during the COVID-19 crisis. The credit is available to tax-exempt employers whose trade or business operations were fully or partially suspended due to a COVID-19-related shutdown order. The credit is based on qualified wages (IRC Section 3121(a)) paid to the employee. For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020. Tax-exempt organizations that have suspended operations, including but not limited to schools, museums, resale shops and private foundations, should pay particular attention to whether they qualify for the credit. Please note that the retention credit cannot be used in conjunction with the Small Business Act loan program discussed later.

Modifications to net operating losses. The use of net operating losses (NOLs) for corporate and noncorporate businesses has been expanded by two primary amendments to IRC Section 172(a). First, taxpayers will not be subject to the 80% taxable income limitation on the use of NOLs, which was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). Second, taxpayers will be able to carryback NOLs incurred in the 2018, 2019 or 2020 tax years to offset any taxable income earned in the prior five years. For tax years beginning after December 31, 2020, the 80% taxable income limitation is reinstated with modifications that increase taxable income by a taxpayer's deductions under IRC Section 199A or 250. Taxpayers that carryback NOLs to a year in which the transition tax (under IRC Section 965) applies will be treated as making an election under IRC Section 965(n), which allows taxpayers to preserve their NOLs.

Modifications to IRC Section 163(j) business interest limitation: The 30% limitation on interest deductions under IRC Section 163(j) has been increased to 50% of a taxpayer's adjusted taxable income for 2019 and 2020.

Modifications to charitable contribution limitation. During 2020, the limitations on deductions for charitable contributions increases for individuals who itemize, as well as for corporations. For individuals, the 50% of adjusted gross income limitation has been suspended for 2020. Additionally, individuals will be permitted an above-the-line deduction, up to $300, for cash contributions. For corporations, the 10% limitation has been increased to 25% of taxable income. The limitation on deductions for contributions of food inventory also increased from 15% to 25%. Tax-exempt organizations can use these provisions to incentivize donors to provide additional support during tax year 2020.

Small-business loan program. Until June 30, 2020, tax-exempt organizations that employ fewer than 500 employees may receive a loan under the Small Business Act. Loan proceeds can be used for payments such as payroll support, mortgage payments, rent, utilities and debt obligations. The CARES Act authorized $349 billion for this program and included several lending incentives, including: a maximum interest rate of 4%; no prepayment fees due from borrowers; increased government guarantee of the loan to 100% through December 31, 2020; and complete deferment of loan payments for at least six months (but not more than a year). The loan program aims to ensure that small exempt organizations are able to meet payroll and pay other necessary bills during this unprecedented time and have a chance to obtain loans without undue hardship. The program cannot be used in conjunction with the retention credit and payroll tax deferral options previously mentioned.

Lower interest rate loans for mid-sized businesses. The CARES Act instructs the Treasury Secretary to endeavor to establish a program or facility to aide mid-size businesses and nonprofits with between 500 and 10,000 employees. Any loans made under such a program would be at an interest rate no higher than 2%, with no payments due in the first six months. These mid-sized businesses must make certain certifications regarding workforce retention/pay/benefits, guarantee not to send jobs offshore (for the term of the loan plus two years), abide by collective bargaining agreements, and not interfere with any union organizing effort.

The breadth of these stimulus packages is far-reaching in an expansive effort to support employers, both taxable and tax-exempt, and employees in this economic era created by the COVID-19 pandemic. The utility and relevance of these various disaster relief provisions will depend on each exempt organization's specific facts and circumstances. We encourage tax-exempt organizations to thoroughly review each of these planning opportunities and tax credits to assess their potential impact and benefit to the entity.

———————————————
RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.

———————————————