Post on 29-Jul-2020
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CARES Act Benefits for Nonprofit Organizations: Payroll
Protection Program, EIDL Loans, Payroll Deferral, and
Retention CreditsWEDNESDAY, JUNE 10, 2020, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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June 10, 2020
CARES Act Benefits for Nonprofit Organizations
Muhyung (Aaron) Lee, Attorney
Proskauer Rose
alee@proskauer.com
Matthew C. Zinna, CPA, Partner
McGill Power Bell & Associates
mzinna@mpbcpa.com
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Today’s Agenda
◼ Overview of the Paycheck Protection Program (PPP)
◼ Planning for Forgiveness of the PPP Loan
◼ Employee Retention Credits
◼ Delay of the Payroll Tax Remittance
◼ Economic Injury Disaster Loans (EIDL)
◼ What’s Next?
Paycheck Protection Program (PPP)
◼ $349B (Round 1) and $310B (Round 2) in loans for small
businesses including 501(c)(3)s and 501(c)(19)
organizations
◼ Loans equal to the lesser of 2.5 times average monthly
payroll or $10M
◼ Compensation capped at $100,000 annually per employee
◼ Payroll costs include health insurance, retirement plan
funding, and employer’s state unemployment taxes
◼ Required good faith certifications regarding the economic
uncertainty of your organization
◼ Any PPP money left?
6
▪ Summary of PPP Approved Lending as of June 4,
2020
Lender Size Approved Loans Approved Dollars
Total Approved 4,551,501 $510,828,384,225
Total Remaining of $659B Approximately $148B
# of ParticipatingLenders 5,458 Average Loan Size: $113,228
7
Paycheck Protection Program (PPP)
▪ Summary of PPP Approved Lending as of June 4,
2020
8
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
How can proceeds be used? Payment of the
following for the period February 15, 2020
through June 30, 2020 (Pre-Flexibility Act –
Now Through December 31, 2020):
◼ Payroll costs
◼ Rent
◼ Utilities
◼ Interest on mortgages
9
Paycheck Protection Program (PPP)
Loan Forgiveness
◼ Two Main Questions:
◼ What are the allowable costs and payments?
◼ What can reduce our forgiveness amounts?
10
Allowable Costs and Payments
◼ Payroll Costs
◼ What?
◼ Compensation -> what about bonuses?
◼ Employer-Paid Health Care Benefits
◼ Employer-Paid Retirement Benefits
◼ Employer-Paid State & Local Taxes
11
Paycheck Protection Program (PPP)
Allowable Costs and Payments
◼ Payroll Costs
12
Paycheck Protection Program (PPP)
Allowable Costs and Payments
◼ Timing of Expenses◼ Payroll Costs
◼ Payroll costs can be incurred or paid during the
covered period
◼ Paid – payroll is considered paid on the date checks
are disbursed or an ACH credit transaction is
originated
◼ Incurred – payroll costs are considered incurred on
the date the employee’s pay is earned
◼ To include incurred payroll that was not paid during
the covered period, it must be paid on or before the
next regular payroll
13
Paycheck Protection Program (PPP)
Allowable Costs and Payments
◼ Overhead Costs◼ Interest on Covered Mortgages
◼ Payments on Covered Rent Obligations
◼ Covered Utility Payments
14
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
Allowable Costs and Payments
◼ Timing of Expenses◼ Rent and Utilities
◼ Measured by payments made during the Covered Period
or incurred during the Covered Period and paid on or
before the next regular billing date
◼ Business Mortgage Interest◼ Measured by payments made during the Covered Period
for any business mortgage obligation on real or
personal property incurred before February 15, 2020
◼ Does not include prepayments.
15
Allowable Costs and Payments
◼ Covered period for forgiveness◼ “Covered period” - 56 day (8 week) period
beginning with the PPP loan disbursement
◼ Covered period can be extended to 168 days (24
weeks)
◼ “Alternative payroll covered period”◼ Period begins on the first day of their first pay
period following PPP loan disbursement date.
◼ This alternative payroll covered period can only
apply to payroll costs
16
Paycheck Protection Program (PPP)
Allowable Costs and Payments
◼ “Alternative payroll covered period”◼ Example:
◼ Loan disbursement date – April 17, 2020
◼ Alternative Period – May 15, 2020
◼ 8-week period end date – June 11, 2020
◼ Alternative period end date – June 21, 2020
◼ Pay frequency: Biweekly
◼ Pay period: April 13, 2020 – April 26, 2020
◼ Pay date: May 1st
Pay Date
May 1, 2020
Pay
Dates Included:
4/13 - 4/26
# of Days # of Days
Covered Period Alternative Period
14 14
14 14
14 14
14 14
4 14
- -
60 70
May 15, 2020 4/27 - 5/10
May 29, 2020 5/11 - 5/24
June 12, 2020 5/24 - 6/7
June 26, 2020 6/8 - 6/21
July 10, 2020 6/22 - 7/5
17-
Paycheck Protection Program (PPP)
Potential Reductions in Forgiveness
◼ Wage Reduction Element
◼ FTE Reduction Element◼ What is an FTE?
◼ What about terminated or voluntary resigned?
18
Paycheck Protection Program (PPP)
Loan Forgiveness Process
◼ Application – SBA Form 3508
◼ Lender Responsibilities
◼ When is this due to the lender?
◼ Documentation:◼ Separate G/L codes
◼ Payroll coding
◼ Separate bank account
19
Paycheck Protection Program (PPP)
PPP Flexibility Act
◼ House & Senate Passed – Strong Bipartisan
Support – Near Unanimous
◼ Major Provisions:
◼ Extending 8-week period to 24 weeks and extending rehiring
deadline
◼ Increasing non-payroll expense limitation from 25% to 40%
◼ Extending Loan Terms from 2 years to 5 years
◼ Extending Program from June 30 to December 31
◼ Ensures Full Access to Payroll Tax Deferment with PPP
20
PPP Flexibility Act – Questions?
◼ Impact on FTE Timing◼ When will this be measured as of ?
◼ Do we need to be planning as diligently?◼ Bonuses?
◼ Covered Periods
◼ Paid versus Incurred?
◼ Will the 60/40 Test Matter?
◼ Employer Payroll Tax Deferrals
◼ Timing of Forgiveness Application◼ When loan funds run out, October 31, or after loan period?
21
Employee Retention Credit - Overview
• Section 2301 of the CARES Act provides “eligible employers” with a
refundable credit against the employer’s portion of Social Security tax for up
to 50% of “qualified wages” paid to employees in 2020
• Purpose is to provide money to employers that are impacted by COVID-19 to
incentivize the employers to keep employees on their payrolls
• In general, credit is available for:‒ An “eligible employer”, which very generally means an employer whose business is
impacted by COVID-19, and
‒ 50% of “qualified wages” paid after March 12, 2020 and before January 1, 2021, but
limited to $10,000 of qualified wages for the 2020 calendar year per employee
• An employer that receives a Paycheck Protection Program loan is not eligible
for the credit
• An employer may receive both the tax credits for qualified leave wages under
the Families First Coronavirus Response Act (FFCRA) and the employee
retention credits under the CARES Act, but not for the same wage payments
23
#1 “Eligible Employer”
• An “eligible employer” is an employer
‒ (a) which was carrying on a trade or business in 2020, and
‒ (b) with respect to any calendar quarter, for which
‒ (i) the operation of its trade or business is fully or partially suspended
due to orders from an appropriate governmental authority limiting
commerce, travel, or group meetings (for commercial, social, religious,
or other purposes) due to COVID-19, or
‒ (ii) such calendar quarter is a period in which it experiences a
“significant decline in gross receipts”
24
#1 “Eligible Employer” (Cont’d)
• “Trade or business”?‒ IRS FAQ says “trade or business” for this purpose is Section 162 trade or
business
‒ Generally, under Section 162, an activity does not qualify as a trade or business
unless its primary purpose is to make a profit and it is carried on with regularity
and continuity
‒ However, a tax-exempt organization is deemed to be engaged in a “trade or
business” with respect to all operations of the organization
• In addition, all operations of a tax-exempt organization are taken into account
in determining whether operation of its trade or business is fully or partially
suspended
25
#1 “Eligible Employer” (Cont’d)
• What does it mean to have operation of the trade or business “fully or partially
suspended”?‒ The IRS FAQ provides a number of examples, but the test is very fact dependent
‒ In general, essential businesses are not considered as fully or partially suspended, even if
the governmental order may have an effect on the employer’s operations‒ But, essential business whose suppliers are unable to make deliveries of critical
goods/materials → Fully or partially suspended [FAQ 31]
‒ Workplace is closed, but employees telework and the employer is able to continue
operations comparable to its operations prior to closure → Not fully or partially suspended
[FAQ 33]
‒ Workplace closed for certain purposes, but the workplace remains open for limited purposes
→ Fully or partially suspended [FAQ 34]
‒ Required to reduce operating hours by governmental order → Fully or partially suspended
[FAQ 35]
‒ If an employer operates in multiple locations and is required to fully or partially suspend its
operations in some jurisdictions, but not in others → Fully or partially suspended [FAQ 36]
‒ Operations of trade business of one member of an aggregated group are suspended by
governmental order → Fully or partially suspended for the entire aggregated group [FAQ 37]
‒ Note: if the order is subsequently lifted, an employer is treated as fully or partially
suspended only for periods during the calendar quarter in which its operations were
suspended [FAQ 38]26
#1 “Eligible Employer” (Cont’d)
• “Significant decline in gross receipts” test‒ An employer is an eligible employer for a calendar quarter, if the gross receipts for
the calendar quarter are less than 50% compared to the same calendar quarter in
the prior year‒ Treated as being an eligible employer until the first calendar quarter when gross
receipts are more than 80% of gross receipts from the same calendar quarter in the
prior year
‒ No need to prove that the decline is related to COVID-19
‒ “Gross receipts”? Total sales (net of returns and allowances), all amounts received
for services and investment income, as determined under Section 448(c)‒ But IRS FAQ indicates that this rule is not applicable for tax-exempts and that it plans
to issue guidance on how tax-exempt organizations are to calculate gross receipts
for purposes of the significant decline in gross receipts test
• Generally, the significant decline in gross receipts test has become more
relevant as states lift stay-at-home orders
27
#1 “Eligible Employer” (Cont’d)
• How does an employer know whether it will satisfy this test? ‒ The test is applied for the entire quarter, but an employer is depositing employment
taxes on a semi-monthly or monthly basis
‒ Need to estimate and take the position that you satisfy the significant decline in
gross receipts test‒ Notice 2020-22 – IRS will not assert a late deposit penalty for employment taxes
relating to qualified wages if (i) the employer paid qualified wages to its employees in
the calendar quarter prior to the date on which the employment taxes were required
to be deposited, (ii) the amount of employment taxes that the employer does not
timely deposit (less the amount of employment taxes not deposited in anticipation of
qualified leave wages under FFCRA) is less than or equal to the amount of the
employer’s anticipated credits for qualified wages, and (iii) the employer did not seek
payment of an advance credit of the anticipated credits for the qualified wages
‒ Alternatively, an employer can wait until the end of the calendar quarter to
determine whether the test is met and file for a refund‒ If an employer determines that it satisfied the significant decline in gross receipts test
after January 1, 2021, it can claim the credit by filing the appropriate form to report
adjustments (typically, Form 941-X)
28
#2 “Qualified Wages”?
• If an eligible employer’s average number of full-time employees in 2019 is
equal to or less than 100, then all wages paid to employees are qualified
wages
• If more than 100, then only the “wages paid by such eligible employer with
respect to which an employee is not providing service” are qualified wages
• Average number of full-time employees‒ Full-time employees: employees that worked more than 30 hours a week or 130 hours a
month for a calendar month
‒ Average is derived by adding the number of full-time employees for each month in 2019
and dividing the sum by 12
‒ For entities that are aggregated under the aggregation rule, the number is calculated at
the aggregated group level
• Qualified wages include certain amounts paid to provide and maintain a group
health plan
29
#2 “Qualified Wages”? (Cont’d)
• What are “wages paid by such eligible employer with respect to which an employee is
not providing service”?‒ Are these only the wages that are paid to employees that are providing no services to the
employer? Or do these wages also include wages paid to employees that are providing a
reduced level of services to the employer?
‒ IRS FAQ 48: “. . . . qualified wages are the wages paid to an employee for time that the
employee is not providing services . . . .”
‒ Example from IRS FAQ 54: Employer T has several locations that are closed during the second
quarter of 2020 due to a governmental order. Employer T continues to pay hourly employees
who are not providing services at the closed locations 50 percent of their normal hourly wage
rates. Employer T also reduced headquarters' administrative staff hours by 40 percent, but
continues to pay them at 100 percent of their normal hourly wage rates. For employees who
are not providing services due to the closure of their location, but are receiving 50
percent of their normal hourly wage rates, Employer T may treat the wages paid as
qualified wages for purposes of the Employee Retention Credit. For the administrative
staff whose hours were reduced by 40 percent, but who are paid for 100 percent of the
normal wage rate, Employer T may treat the 40 percent of wages paid for time that these
employees are not providing services as qualified wages for purposes of the Employee
Retention Credit.
30
#3 Aggregation rules
• Aggregation rules under section 52(a) or (b) / 414(m) or (o) apply to treat
multiple entities as a single employer for purposes of the employee retention
credit rules‒ Section 52(a) and (b)
‒ Very generally, companies related through greater than 50% ownership (by vote or value /
profits or capital interest) are treated as one employer
‒ Section 414(m) – “affiliated service group” rules
‒ Section 414(o) – proposed regulations for “leased owner”
• Consequences of being treated as a single employer‒ If a member receives a PPP loan, other members may not claim the credit
‒ Entities are viewed together for purposes of “significant decline in gross receipts”
test and 100-employee test for qualified wages
‒ Also applies for fully or partially suspended test
31
#4 How is credit applied?
• Statute applies credits against employer’s portion of Social Security tax
• Refund provisions referenced is the general refund provision for
overpayments (Sections 6402(a) and 6413(b))‒ Section 6402(a): “In the case of any overpayment, the Secretary . . . . may credit the
amount of such overpayment, including any interest allowed thereon, against any liability
in respect of an internal revenue tax on the part of the person who made the
overpayment and shall . . . . refund any balance to such person”
• Instructions to Form 7200 & IRS FAQ: an employer can apply the credit
against its “employment taxes”‒ Includes federal income tax withholding for wages, Social Security tax and Medicare tax
(both employer’s and employee’s portion), but not FUTA
‒ Allows employers to retain cash to maintain liquidity
‒ Any excess may be refunded to the employer by filing Form 7200
• Interaction with payroll tax deferral – an employer can use the credit amount
to offset the employer’s non-Social Security tax portion of employment taxes
and defer its Social Security tax payments under the payroll tax deferral rules
32
Payroll Tax Deferral
• Under Section 2302 of the CARES Act, employers can defer payments of the
employer’s portion of Social Security tax‒ IRS FAQ says that an employer will not be required to make an election to be able to
defer these payments
• Deferred taxes must be paid over the following two years‒ 50% due by 12/31/21
‒ Remaining 50% due by 12/31/22
• An employer that has its PPP loan forgiven is eligible for the deferral‒ Ineligible under the CARES Act, but amended under Paycheck Protection Program
Flexibility Act of 2020
33
Proposed Changes Under the HEROES Act
• On May 15, 2020, House passed the Health and Economic Recovery Omnibus
Emergency Solutions Act (the HEROES Act), which would, among other things,
substantially expand the employee retention credit rules
• Some of the main changes to the employee retention credit rules are:‒ Credit amount is increased to 80% of qualified wages (vs. 50%) and cap on credit is
increased to $36,000 (vs. $5,000) per employee for all calendar quarters
‒ PPP borrowers may receive employee retention credit
‒ In determining qualified wages, the 100 full-time employee test is replaced with 1,500
full-time employees AND gross receipts of more than $41.5 mm in calendar year 2019
‒ Only 10% reduction in gross receipts to satisfy the “significant decline in gross receipts”
test (but subject to certain reduction rules on credit amount, if gross receipts for
applicable calendar quarter are not less than 50% of gross receipts in prior year’s
calendar quarter)
‒ Clarifies that gross receipts for tax-exempt organization means amount received in
annual accounting period from all sources without subtracting any costs or expenses
34
SBA Economic Injury Disaster Loans
◼ Businesses with fewer than 500 employees
◼ Up to $2 million working capital loan with
up to a 30-year term @ 2.75%
◼ Interacts with Paycheck Protection Program
◼ Apply only through the SBA @ SBA.gov
◼ Biggest Advantage◼ Advanced emergency grants within 3 days that
do not have to be repaid BUT…
◼ Are these still available?
36
Keeping Perspective
◼ Look Beyond Finite Cash Flow Management
◼ Identify Critical Cash Planning Tactics:
◼ Discuss short and long term financing
◼ Maximize donor impact
◼ Manage vendor relationships and expenses
◼ Take care of your most valuable assets
37
Financing◼ Short Term:
◼ Economic Injury Disaster Loans (EIDL)
◼ Paycheck Protection Program (PPP)
◼ Employee Retention Credits
◼ Delay Payment of Payroll Taxes
◼ Long Term:◼ Build your relationship with key business
advisors (bankers, investment managers,
accountants, attorneys)
◼ Loan restructuring
◼ Leasing vs. Buying
◼ Board Designated Endowment38
Capitalize on Giving Incentives
◼ Standard Deduction Filers:◼ Above-the-line deduction for $300 cash
contributions
◼ Itemized Deduction Filers:
◼ Increase in cap of annual contributions
effectively eliminated for 2020
◼ Corporations:
◼ Increase in annual limit from 10% to 25%
of taxable income
39
Vendor Relationships
◼ Identify Critical Vendors:◼ Adjust terms of purchase orders
◼ Identify ways to help each other
◼ Tighten Your Budget
◼ Pause or Stretch Out Payments
◼ Build Relationships
◼ Do we have any exposure here?
40
Employee Recognition
◼ Bonuses (maximize PPP loan
forgiveness)
◼ Furlough or Reduced Hours
◼ COMMUNICATION
41