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Why This Small Business Advisor Gives The Small Business Loan Program a C- Grade

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Watch the Interview

David Dodson, small business advisor and professor of management at Stanford University, joins “Squawk Alley” to discuss the federal small business loan program as Congress works to approve more funds. Senate Democrats on Thursday blocked a Republican push to unanimously pass a bill to put $250 billion more into a loan program for small businesses devastated by the coronavirus pandemic. With only a few senators in the Capitol, Senate Majority Leader Mitch McConnell tried to approve the measure by a unanimous vote. Sen. Ben Cardin, D-Md., objected to the request, stalling the legislation. Speaking on the Senate floor, McConnell said he was not “talking about changing any policy language” the parties negotiated last month as part of an unprecedented $2 trillion emergency spending package. He urged Democrats not to “block emergency aid you do not even oppose just because you want something more” — tweaks to the small business aid program and more emergency funding for hospitals and states, a proposal Democratic leaders outlined Wednesday. After Cardin rejected the measure, he called McConnell’s move to pass the funding a “political stunt.” He pushed for provisions including money for Small Business Administration disaster assistance grants so that people who do not already have a banking relationship can receive the aid.

CNBC Squawk Alley. “Why This Small Business Advisor Gives The Small Business Loan Program a C- Grade” YouTube, uploaded by CNBC Television, 9 April 2020, https://www.youtube.com/watch?v=aitQhlnrIh4, All rights reserved.

Nonprofits and Higher Education: How Does The CARES Act Help?

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By Andrea Wilson

Nonprofit organizations and higher education institutions have been hard at work trying to help the world navigate the novel coronavirus (COVID-19) pandemic.  While trying to maintain focus on their missions, these organizations and institutions face massive uncertainty in the face of COVID-19, including financial turmoil, layoffs, remote work, quarantines, shelter-in-place orders and other measures.

While the programs and initiatives in the Coronavirus Aid, Relief, and Economic Security (CARES) Act are primarily intended to assist businesses, there are many programs that nonprofits and higher education institutions can benefit from. As nonprofits and institutions grapple with both the increasing need for services and prolonged economic instability, the CARES Act provides some reprieve.

It is important for nonprofits and higher education institutions to note that federal agencies are working to develop guidance around how specific provisions of the CARES Act will work in practice. The Small Business Administration (SBA), for example, has up to 15 days following the enactment of the CARES Act to issue regulations. Issuance of regulations and guidance may delay loan approval and disbursement or modify/waive certain loan requirements.
 

Nonprofit Eligibility for Small Business Disaster Loans

The CARES Act authorized two SBA disaster loan programs—The Paycheck Protection Program (PPP) and the Emergency Economic Injury Disaster Loans (EIDL) program. The PPP program is limited in scope to 501(c)(3) and 501(c)(19) non-profit organizations, while all non-profit organizations are eligible for the emergency EIDL program. Since the COVID-19 EIDL program was approved by the national emergency declaration back on March 13, many nonprofits and higher education institutions have likely already applied for one of these loans. While organizations may be worried this will jeopardize their eligibility under the PPP, both loans are permitted. Organizations may receive an EIDL and loans under other programs, such as the PPP, if the basis for the loans and/or costs being paid with each loan are different. For example, you can’t use both the EIDL and PPP for payroll. In other words, no double dipping or duplicating the benefit.
 

Paycheck Protection Program

This $349 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.
 
Who can qualify?
Registered 501(c)(3) charities, 501(c)(19) veterans organizations, and tribal business concerns that either: employ no more than 500 employees (including full-time and part-time workers), or have more than one physical location (with 500 or fewer employees per location) and are assigned a North American Industry Classification System (NAICS) code beginning with 72 may participate in the Paycheck Protection Program. Note that other nonprofit organizations are not eligible for the program. 

How much are the loans and what can they be used for?
The maximum amount for these loans is 2.5 times the average total monthly payroll costs for the prior 12-month period, or up to $10 million, with deferred loan payment of up to one year.  The loans may be used for the following:

  • Payroll costs
  • Employee compensation (excludes compensation in excess of $100,000 on an annual basis)
  • Continuation of healthcare benefits
  • Interest payments on mortgages entered into before February 15, 2020 (but not prepayment or payment of principal)
  • Rent for a lease entered into before February 15, 2020
  • Utilities, including electricity, gas, water, transportation, telephone, or internet
  • Interest on any debt incurred before February 15, 2020

Loans would be backed by a 100 percent federal guarantee through December 31, 2020, at which time the guarantee percentage would revert to the standard Section 7(a) loan guarantee.

How do you apply?
The application is available through the Treasury Department website. You will need to complete the PPP loan application and include your payroll information. Once complete, organizations need to submit to an approved lender by June 30, 2020. Although the program is open until the end of June, we encourage you to apply as quickly as you can, as it takes time for lenders to process the loan, and there is an overall funding cap.
 
When can you apply?

  • Starting April 3, 2020, nonprofits, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.

What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:

  • The loan is needed to support ongoing operations during the COVID-19 emergency.
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • You have not and will not receive another loan under this program.
  • All the information you provided is true and accurate.

Is there loan forgiveness?
Yes, if you meet certain conditions. The SBA will grant forgiveness up to the total amount borrowers spent of up to eight weeks of payroll costs and mortgage interest, rent, and utility payments between February 15 and June 30, 2020 if the borrower retains its employees and salary levels.  Loan forgiveness is prorated for organizations who do not maintain payroll.  The CARES Act provides an exception to the reduction if the eligible entity re-hires employees and/or eliminates the reduction in salaries by June 30, 2020.  Forgiven amounts do not need to be reported as taxable income. The Treasury Department is anticipating that not more than 25 percent of the forgiven amount may be for non-payroll costs.

Expanded Economic Injury Disaster Loan and Loan Advance

The CARES Act provides $10 billion for the Economic Injury Disaster Loan (EIDL) Program under Section 7(b) of the Small Business Act. The CARES Act made several changes to the EIDL program, which is available to nonprofits and businesses of all sizes in a declared disaster area. Currently, all 50 states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands have all been declared disaster areas for purposes of the EIDL Program. These loans are processed directly through the SBA.

How much are the loans and what can they be used for?
EIDL funds are available for a maximum amount of $2 million, carry an interest rate of 3.75 percent, and have a maximum term of 30 years. Loans over $200,000 must be guaranteed by any owner having a 20 percent or greater interest in the applicant. However, the CARES Act removed the requirement for personal guarantees on loans under $200,000.

Who can qualify?
The CARES Act expands eligibility for EIDL to include tribal businesses, cooperatives, and employee stock ownership plans (ESOPs) with fewer than 500 employees, or any individual operating as a sole proprietor or independent contractor between January 31, 2020 and December 31, 2020. Private nonprofits are also eligible for EIDLs. Until December 31, 2020, the SBA can approve EIDLs based solely on an applicant’s credit score or an alternative appropriate method for determining an applicant’s ability to repay.

How do you apply?
To apply for a COVID-19 Economic Injury Disaster Loan, click here.

When can you apply?
You can apply for these loans now. To speed up the process, an applicant may request an expedited disbursement that is to be paid within three days of the request. The advance may not exceed $10,000 and must be used for authorized costs but is otherwise not repayable if the EIDL is not approved.

What is required to be eligible?
Thanks to the CARES Act, a borrower no longer is required to be turned down for credit elsewhere, which often delayed the EIDL process. Additionally, the CARES Act waived the requirement that businesses be in operation for one year prior to the disaster. Removal of these requirements will expedite the loan process to get SBA disaster dollars into the hands of nonprofits and higher education institutions more quickly.

Is there loan forgiveness?
No.

Department of Treasury Assistance for Nonprofits and Higher Education

Exchange Stabilization Fund (Mid-Size Loan Program)
The CARES Act provides $454 billion as loans, loan guarantees, and investments for eligible businesses, states, and municipalities. Within the $454 billion, it was Congress’ intent that the Secretary of the Treasury make loans and investments available—to the extent practicable— to mid-size businesses and nonprofits.

Who is eligible?
It is important to note that unlike the PPP, these funds are available to all nonprofit organizations and not limited to 501(c)(3)s. These loans should be at a rate not higher than two percent annualized with no payments for the first six months.

What is required to apply?
If your nonprofit organization would like to benefit from this loan, you must provide a Good-Faith Certification that:

  • Economic uncertainty requires those terms;
  • Funds received will be used to retain 90 percent of the workforce at full compensation and benefit levels before Sept. 30, 2020;
  • An intent to restore not less than 90 percent of the workforce prior to Feb. 1, 2020 while restoring all compensation and benefit levels to workers no later than four months after their termination date; and
  • Certify that your organization will not outsource or offshore jobs for the term of the loan or two years after completing repayment of the loan; and
  • Certify that they will not abrogate collective bargaining rights during this time and will remain neutral in a union organizing effort for the term of the loan.

We expect these loans to be highly competitive, so we would encourage nonprofits to begin preparing now by collecting the necessary documents and completing applications as soon as possible.
 

Employment Provisions

Organization may be faced with difficult decisions in response to this unprecedented pandemic, including weighing whether to continue to pay workers or make the difficult decision to furlough your employees so they are able to file for unemployment benefits. The employment provisions in the CARES Act are to support employees who lose their jobs due to COVID-19.

Unemployment Reimbursements
All 501(c)(3) organizations have the option of paying unemployment insurance tax or self-insuring. The CARES Act reimburses 501(c)(3) organizations for half of their costs of unemployment benefits provided to laid-off employees. For charities that are tax-exempt from unemployment laws, the organizations are not eligible to receive unemployment benefits. However, organizations can receive this benefit if they voluntarily choose to self-insure.

Unemployment Benefits
COVID-19 is having a significant impact on unemployment throughout the nation, and the nonprofit sector is not exempt. The CARES Act allows employers to claim a new credit against applicable employment taxes in an amount equal to 50 percent of the qualified wages paid after March 12, 2020, and before Jan. 1, 2021, with respect to certain employees, up to a maximum of $10,000 of wages per employee.

The Act includes a specific section related to nonprofit organizations, which allows organizations to be reimbursed for half of the costs incurred through the end of 2020 to pay unemployment benefits. For this credit, any employer that is a tax-exempt organization described in IRC Section 501(c), is deemed to be an eligible employer with respect to all its operations. However, if your organization receives a loan under the PPP (discussed above), then your organization will not be eligible for this credit.

The Act also provides an additional $600 per week payment to those receiving unemployment benefits under their respective state laws and Pandemic Unemployment Assistance participants for up to four months. In addition, the Act provides federal funding for thirteen weeks of additional unemployment benefits through the end of 2020.
 

Tax Provisions

Employee Retention Credit for Employers
The CARES Act provides a refundable payroll tax credit for 50 percent of wages paid to your employees during the COVID-19 crisis if your organization is eligible. Your nonprofit, 501(c) organization is eligible for a partially refundable employee retention credit if:

  • operations were fully or partially suspended, due to a COVID-19-related shut-down order, or
  • gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

For organizations with more than 100 full-time employees, wages will be considered “qualified” when they are paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For organizations 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 shut-down 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.

Universal Charitable Deductions
The CARES Act also included a temporary universal charitable deduction. This deduction will allow all taxpayers, even those who do not currently itemize their deductions, to claim a charitable deduction for cash donations up to $300 through December 31, 2020.  Recent limitations on charitable donations by individuals were also suspended, for example the 60 percent adjusted gross income limitation. For corporations, the limitation of 10 percent of taxable income was increased to 25 percent.

Delay of Certain Payroll Tax Payments
The CARES Act allows for employers, including tax-exempt organizations, to delay the payment of employer payroll taxes for the 2020 tax year. Fifty percent of employer payroll taxes are due by December 31, 2021. The remaining fifty percent of the employer’s portion of the 2020 payroll tax is due December 31, 2022. However, if your organization receives loan forgiveness of an SBA loan, your organization will not be eligible for a delay.

Minimum Funding Rules for Certain Charities
The CARES Act modifies the minimum funding rules for pension plans sponsored by charitable organizations whose primary purpose is to provide medical care and assistance to mothers and children, to allow for more flexibility in the amount of required payments.

Our team is in the process of putting together an advisory on Frequently Asked Questions about these programs to provide additional clarity about how nonprofits can take advantage of these funds and new provisions. While it’s still difficult to predict the full extent of the impact of COVID-19, we are closely monitoring this rapidly evolving situation, offering guidance to help you through this time of uncertainty.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” blog (April 3, 2020). Copyright © 2020 BDO USA, LLP. All rights reserved. www.bdo.com

What Individuals Need To Know About The CARES Act

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On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 was enacted, becoming the first of three Congressional relief and stimulus acts passed in March and setting off a firestorm of administrative relief by several federal agencies including the IRS and Department of Labor.

This alert briefly summarizes the following relief provisions enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020.

  • Temporary waiver of required minimum distribution (RMD) rules for certain retirement plans and accounts
  • Temporary waiver of early distribution penalty from tax-qualified plans and special rules related to plan loans
  • Changes to charitable contribution deduction limitations
  • Net operating loss (NOL) carrybacks for losses generated after December 31, 2017
  • Postponement of excess business loss limitation and relief for limitations incurred in 2018 and 2019
  • Recovery rebates for individuals

Temporary Waiver of RMD Rules for Certain Retirement Plans and Accounts

Generally, required minimum distributions must begin at age 72 for individuals born on or after July 1, 1949, or at age 70 ½ for individuals born before July 1, 1949.

The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This applies even for taxpayers who turned 70 ½ in 2019 but deferred their first RMD to April 1, 2020.

RMDs that have already been taken in 2020 may be rolled over within 60 days of the distribution.

Insights:

Waived RMDs do not need to be taken in subsequent years. However, any forgone RMD in 2020 will affect the account balance used to calculate the RMD in 2021 and future years. It is not known whether additional relief will be offered for individuals who took their RMD early in 2020 and are already outside the 60-day rollover window. RMDs were last waived in 2009. At that time, the IRS issued a notice stating that the 60-day rollover deadline would be satisfied if completed by a given date that year. It is possible that similar guidance will be issued this year.

Special Rules for Use of Retirement Funds

Eligible individuals can withdraw up to $100,000 for coronavirus-related purposes from tax-qualified retirement plans during 2020 without incurring the usual 10% early distribution penalty.

Taxable distributions should generally be included in gross income ratably over a three-year period.

Taxpayers may recontribute the withdrawn amounts in one or more re-contribution payments to the qualified plan at any time within three years of the distribution. These repayments will be treated as a tax-free rollover and not subject to that year’s cap on contributions.

The CARES Act also makes it easier to borrow money from 401(k) plans, raising the borrowing limit from $50,000 to $100,000 for the first 180 days after enactment, and by delaying the payment dates for any loans due the rest of 2020 for one year. (The CARES Act was enacted March 27, 2020; the 180-day window closes September 23, 2020.)

Coronavirus-related distributions are made to an individual (i) diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (ii) whose spouse or dependent is diagnosed with COVID-19 by such a test; or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Notably, however, a “dependent” here is defined more broadly than a “qualifying child” for purposes of the recovery rebates. Here, “dependent” includes children under the age of 19 or full-time students under the age of 24 as of December 31, 2020. In addition, individuals who are permanently and totally disabled may also be considered dependents, as can certain other qualifying relatives such as parents and in-laws.

Insights:

Given that COVID-19 tests are in short supply, it’s likely that most individuals will look to the last catch-all category for relief under this provision.

What’s unclear in the CARES Act is the timing of these two three-year periods and whether they run concurrently, or whether the three-year gross income inclusion period is subsequent to the three-year payback period.

California has its own early distribution penalty and while California’s statue generally conforms to the federal Internal Revenue Code, California likely needs to enact its own legislation to offer similar relief.

Allowance of Partial Above-The-Line Deduction for Charitable Contributions

Individuals who do not elect to itemize their deductions in 2020 may take a qualified charitable contribution deduction of up to $300 against their adjusted gross income in 2020. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) which is made to certain publicly supported charities.

Insights:

This above-the-line charitable deduction may not be taken for contributions to a non-operating private foundation or a donor advised fund.

Modification of Limitations on Charitable Contributions During 2020

Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the succeeding five years.

The CARES Act suspends the AGI limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s AGI.
Any excess is still carried forward as a charitable contribution in each of the succeeding five years.

Insights:

​This provision benefits taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. Contributions to non-operating private foundations or donor advised funds are not eligible for the 100% AGI limitation.

Net Operating Losses

Previously, NOLs generated beginning in 2018 were limited to 80% of taxable income computed without regard to any NOL deduction. Any unused NOL was not able to be carried back but could be carried forward indefinitely.

The CARES Act permits individuals with NOLs generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry back such NOLs five taxable years. Such NOLs not carried back may continue to be carried forward indefinitely. The CARES Act also eliminates the 80% taxable income limitation imposed by the TCJA for taxable years beginning before January 1, 2021.

Insights:

Taxpayers with NOLs generated in 2018 and 2019 may find it advantageous to amend returns prior to those years to carryback NOLs to years with taxable income subject to a 39.6% tax rate.

Excess Business Loss Limitations

Beginning in 2018, net business losses in excess of $500,000 for joint filers ($250,000 for all other taxpayers) were not allowed as a current deduction against other income. These threshold amounts were indexed for inflation and, in 2020, were scheduled to be $518,000 for joint filers ($259,000 for all other taxpayers). The disallowed business losses became a net operating loss applied to subsequent taxable years.

The CARES Act suspends the application of this excess business loss rule for 2020, and retroactively suspends the excess business loss limitation rule for 2018 and 2019. Thus, taxpayers will be allowed to offset their business losses against other income for 2020. 

Insights:

Taxpayers will need to address with their tax advisors the impact of the retroactive removal of the excess business loss limitation rule for 2018 and 2019.  Many taxpayers have not yet filed for 2019 and the removal of the loss limitation rule should be considered in the preparation of the 2019 return. If a taxpayer was subject to the excess business loss rule in his or her 2018 tax return, the taxpayer should amend his or her 2018 return to take advantage of the elimination of the rule for 2018.  Taxpayers may have a refund opportunity for 2018 if their net business losses were limited and may also find their 2019 tax liabilities either increased or decreased, depending on whether their business losses were being carried forward to 2019 or were sustained in 2019 but were limited.

Recovery Rebates for Individuals

Eligible individuals will receive a refundable tax credit against their 2020 taxable income equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their most recent income tax filing – the 2018 or 2019 tax return, as appropriate.

The credit begins to phase out if the individual’s AGI exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers), and is reduced by an amount equal to 5% of the amount in which the taxpayer’s AGI exceeds these thresholds. As a result, individuals with no qualifying children completely phase out of the credit if their AGI exceeds $99,000 ($198,000 for joint filers). Individuals with two qualifying children completely phase out of the credit if their AGI exceeds $119,000 ($218,000 for joint filers).

If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Individuals who are otherwise not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously electronically filed their income tax returns using direct deposit banking information provided on a return any time after January 1, 2018.

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, and trusts.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) has lived with the taxpayer for more than half of the year and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

Insights:

Individuals between the ages of 17 and 24 are ineligible to be claimed as a qualifying child and may be unable to claim their own independent rebate if they are eligible dependents on their parents’ tax return. Eligible dependents include children under the age of 19 or full-time students under the age of 24 who do not provide more than half of their own support and who live with the taxpayer for more than half the year.