Posted By Jonathan D. Moll, CPA
Many nonprofit organizations are facing an uphill climb managing the financial challenges brought about by the COVID-19 pandemic. There have been several adjustments made to employee expenses, programs delivered, services offered, and fundraising. A recent study from the Charities Aid Foundation of America found that up to a third of nonprofits could close within 12 months if current conditions persist. Fortunately, there are resources available both from federal funding and temporary changes to the tax code that could help bridge the gap and sustain operations.
More than the Paycheck Protection Program (PPP), the CARES Act established new rules and guidelines to help nonprofits stay afloat following the COVID-19 pandemic. Because PPP has received most of the attention, some of these other changes to the tax code might not be as well known.
- Above-the-line deduction for certain individual taxpayers making a charitable donation of up to $300
- Temporary increases on the limitation on individual charitable deductions in 2020
- Increase of deduction limitation for corporations making a charitable donation, from 10 percent to 25 percent of taxable income
- Main Street Lending Program opportunities for nonprofits
- Economic Impact Disaster Loans (EIDL) funding opportunities
- Sector-specific CARES Act funding
Restored Charitable Deduction Benefits
Funding from individual donors remains the single largest source of donations for most nonprofits. In 2017, the Tax Cuts and Jobs Act made individual donations less tax-friendly when it eliminated or reduced several above-the-line deductions, notably the popular charitable donation deduction. For 2020, individual taxpayers are permitted to deduct cash donations of up to $300 to qualified 501(c)(3) organizations. To claim the deduction, taxpayers must take the standard deduction on their federal tax return. Stocks and donor-advised funds do not qualify.
These same taxpayers also get a break on the limitation for 2020 charitable deductions. Under current law, individual taxpayers are permitted to deduct up to 60 percent of adjusted gross income, or 30 percent for some types of nonprofit organizations and private foundations. The CARES Act also temporarily lifted those restrictions for 2020 for cash donations. Deductions for donations of food inventory are also temporarily increased, from 15 to 25 percent. To realize this benefit, taxpayers must itemize on their federal tax return.
In addition, business taxpayers also have an incentive to increase charitable contributions in 2020. Under current law, corporations are limited to deducting no more than 10 percent of taxable income for charitable contributions. In 2020, that limit has increased to 25 percent as long as the donations are cash given to a public charity. Contributions to private foundations of donor-advised funds do not qualify.
In either case, it is worthwhile to reach out to current and past donors to educate them on the CARES Act changes for donation deductions. Many taxpayers might not be aware and if nonprofit organizations make it easy to donate, it is a win-win scenario.
Main Street Lending Program for Nonprofits
As part of the CARES Act, the Main Street Lending Program has been helping forprofit businesses with Fed-backed loans. The first three Main Street programs offered short-term, low-interest loans to qualifying small and mid-size businesses that were in good financial standing before COVID-19. In June 2020, the Fed announced proposals for two new Main Street programs targeted to nonprofits. Unlike the PPP, which was intended to be mostly forgivable funding, Main Street Lending Programs are true loans. Even if a nonprofit institution already received PPP funding, it could still qualify for Main Street loans.
Loan terms are similar to forprofit businesses. Principal payments can be deferred for the first two years of the loan and interest payments can be deferred for the first full year. There are two loan options in the Fed’s proposal. The first lending option is for new nonprofit loans. Loan sizes range from $250,000 to the lesser of $35 million or the organization’s 2019 average quarterly revenue. The second loan option is for nonprofit expanded loans. The minimum loan size is $10 million with a cap of either $300 million or average 2019 quarterly revenue, whichever is less. Both loan types are for five-year terms.
Proposed eligibility criteria for nonprofits are as follows.
- Between 50 and 15,000 employees
- Minimum financial ratios measuring the thresholds for operating performance, liquidity, and ability to repay debt
- Operational history of at least five years, meaning the nonprofit must have a continuous track record of operations since January 1, 2015
- 2019 revenue less than $5 billion and less than 30 percent of revenue from donations
- $3 billion limit on endowments
- 501(c)(3) or 501(c)(19) tax-exempt organization
This chart from the Fed’s website is a useful guide for understanding proposed eligibility criteria and loan terms for nonprofit Main Street Lending Programs.
Proposed Main Street Lending Program Nonprofit Loan Options
|Nonprofit New Loans||Nonprofit Expanded Loans|
|Term||5 years||5 years|
|Minimum Loan Size||$250,000||$10M|
|Endowment Cap||$3 billion||$3 billion|
|Years in Operation||At least 5 years||At least 5 years|
|Employee Min/Max||Employees fewer than 15,000 & greater than 50||Employees fewer than 15,000 & greater than 50|
|Revenue Cap and Source Requirement||2019 Revenues less than $5 billion, with less than 30% sourced from donations||2019 Revenues less than $5 billion, with less than 30% sourced from donations|
|Maximum Loan Size||The lesser of $35M, or the borrower’s average 2019 quarterly revenue||The lesser of $300M, or the borrower’s average 2019 quarterly revenue|
|Principal Repayment||Principal deferred for two years; years 3-5: 15%, 15%, 70%||Principal deferred for two years; years 3-5: 15%, 15%, 70%|
|Interest Payments||Deferred for one year||Deferred for one year|
|Rate||LIBOR + 3%||LIBOR + 3%|
Sector-Specific CARES Act Funding
Certain nonprofits may be eligible for additional CARES Act funding, depending on their operating sector. Examples include:
- $4.3 billion in funding allocated to the CDC to support federal, state, and local public health agencies responding to the coronavirus pandemic.
- $3.5 billion to the Child Care Development Block Grant to support childcare and early education programs.
- $955 million to support nutrition programs, home and community-based services, support for family caregivers, and more through the Administration for Community Living.
- $150 million to state arts and humanities agencies supporting arts organizations, museums, libraries, and other organizations.
Funding opportunities abound for nonprofits seeking funding assistance. The additional incentives to make charitable contributions should help to spur additional charitable donations. If you have questions about the information outlined above or need assistance with a nonprofit tax or audit issue, Belfint, Lyons & Shuman can help. For additional information call us at 302.255.0600 or click here to contact us. We look forward to speaking with you soon.