FOR LIVE PROGRAM ONLY CARES Act Benefits for...

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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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mailto:[email protected]

June 10, 2020

CARES Act Benefits for Nonprofit Organizations

Muhyung (Aaron) Lee, Attorney

Proskauer Rose

[email protected]

Matthew C. Zinna, CPA, Partner

McGill Power Bell & Associates

[email protected]



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


▪ Summary of PPP Approved Lending as of June 4,

2020

8



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


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

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◼ Payroll Costs

12



◼ 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

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◼ Overhead Costs◼ Interest on Covered Mortgages

◼ Payments on Covered Rent Obligations

◼ Covered Utility Payments

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◼ 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


◼ 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



◼ “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-


Potential Reductions in Forgiveness

◼ Wage Reduction Element

◼ FTE Reduction Element◼ What is an FTE?

◼ What about terminated or voluntary resigned?

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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


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?

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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”

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#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


• 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


• “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


• 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)

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#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

Contact Information

Matt Zinna, CPA – [email protected]

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