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Tax relief for tax-exempt organizations in “phase 3” coronavirus legislation (COVID-19)
Tax relief for tax-exempt organizations
Congress is poised to enact a massive “phase 3” bill, reportedly with a cost approaching $2 trillion. This third bill—the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act)—includes a significant number of tax items that are relevant to exempt organizations and their donors.
- Read H.R. 748, the CARES Act [PDF 1.08 KB] (880 pages)
- Read a revenue estimate provided by the Joint Committee on Taxation (JCT): JCX-11-20
Direct assistance to charitable organizations
The bill authorizes U.S. Small Business Administration loans of up to $10 million to eligible employers, including certain tax-exempt employers, with not more than 500 employees for payroll support, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. The loans may be forgiven for documented amounts paid or incurred between February 15 and June 30, 2020, but such forgiveness can be reduced where the employers cut employees or wages during that period and do not rehire before June 30. Any indebtedness that is forgiven under this program would be excluded from the borrower’s taxable income. Loans must be made before June 30, 2020.
In addition, the bill instructs the Treasury Secretary, through the Federal Reserve, to implement a program to make direct loans to eligible businesses including, nonprofit organizations, with between 500 and 10,000 employees, at an interest rate of not more that 2%, with no principal or interest due or payable for the first six months (or for a longer period as Treasury may determine). Any borrower under this program must make a good-faith certification that, among other things, the funds it receives will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until September 30, 2020.
Tax-exempt employers
The bill contains several provisions relevant to tax-exempt organizations as employers.
Employee retention payroll tax credit for certain businesses
The bill provides a refundable payroll tax credit for 50% of wages paid by certain employers to employees. The bill provides the credit is available to tax-exempt employers for any calendar quarter in calendar year 2020:
- During which operations were fully or partially suspended, due to the COVID-19 crisis, or
- That falls within a period beginning with a quarter in which gross receipts declined by more than 50% when compared to the same quarter in the prior year and ending in the quarter when gross receipts are greater than 80% of gross receipts for the same calendar quarter for the prior year.
The credit is for “qualified wages.” For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19 circumstances. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit. Average number of full-time employees is determined based on 2019 under section 4980H rules.
The credit is capped at the first $10,000 of compensation, including health benefits, paid to the employee. The credit is not to exceed the employer portion of social security taxes reduced by the paid sick leave and paid extended FMLA established by the coronavirus “phase 2” legislation. The provision is effective for wages paid or incurred from March 13, 2020, through December 31, 2020.
This credit is not available to state and local governmental entities, presumably including state universities.
KPMG observation It appears that the bill uses sections 52 and 414 aggregation rules to determine which entities are treated as a single employer; likely employers can leverage existing use of these rules in the qualified plan context to identify themselves as a single employer for purposes of this provision. |
Delay in employer payroll taxes
The bill allows employers to defer payment of the employer share (6.2%) of the Social Security tax they otherwise are responsible for paying in 2020. Fifty percent (50%) of the deferred payroll taxes are due on December 31, 2021, and the remaining amounts are due on December 31, 2022.
Other provisions relevant to tax-exempt organizations as employers, include:
- A temporary income tax exclusion for those individuals who receive student loan repayment benefits from their employers
- Modifications relating to the payroll credit for required paid sick leave enacted as part of “phase 2” COVID-19 response legislation
- A waiver of the early withdrawal penalty for certain coronavirus-related withdrawals from qualified retirement plans
- A temporary waiver of the required minimum distribution rules for certain retirement plans and accounts
For more information on these provisions, read KPMG’s preliminary report and analysis of tax provisions in the CARES Act [PDF 3.1 MB].
Incentives for charitable giving
The bill includes several provisions that increase incentives for charitable giving by both businesses and individuals.
Modification of charitable contribution limitation for corporations
The bill increases the limitations on deductions for charitable contributions for corporations that make cash contributions in 2020 from 10% of taxable income to 25% of taxable income. Contributions must be made to a public charity or foundation described in section 170(b)(1)(A), but contributions to a supporting organization or a donor-advised fund would not qualify for the increased limits. The relevant percentage limitation applicable to certain donations of food inventory (namely, those that are eligible for an enhanced charitable deduction) are also increased for donations made in 2020, from 15% to 25%.
Changes to charitable deduction rules for itemizers and non-itemizers
The bill provides a new “above the line” charitable contribution deduction of up to $300 to individuals who do not itemize their deductions. For individuals who do itemize their deductions, the bill permits a charitable contribution deduction of up to 100% of their adjusted gross income. Both the above-the-line deduction and the increased limitation require the contribution to be made in cash, in 2020, and to a public charity or foundation described in section 170(b)(1)(A). Contributions made to a supporting organization or a donor-advised fund do not qualify for either the above the line deduction or the increased limits.
KPMG observation Congress commonly raises the percentage limitation for presidentially declared disasters, but, when it does so, it typically requires the charitable contribution to be made for disaster relief efforts and requires the taxpayer to obtain a written acknowledgment of the use of the contribution for this purpose. However, in this case, there is no requirement that a contribution be used in COVID-19 relief efforts in order to take advantage of the higher percentage limitations. |
Tax provisions that could affect UBIT
The bill also includes the following generally applicable tax provisions that could affect exempt organizations with unrelated businesses or taxable subsidiaries:
- Changes to the rules governing net operating losses (NOLs), including a five-year carryback of certain 2018, 2019, and 2020 losses and, temporarily, the ability to fully offset income
- Temporary relaxation of the section 163(j) limitation on business interest expense deductions to 50% of adjusted taxable income for tax years beginning in 2019 and 2020, and an election to use 2019 adjusted taxable income for tax years beginning in 2020
- Temporary acceleration of refundability of corporate alternative minimum tax (AMT) credits
- Suspension of the limitation on loss rules for tax-exempt trusts for tax years beginning after 2017 and before 2021
For more information on these provisions, read KPMG’s preliminary report and analysis of tax provisions in the CARES Act [PDF 3.1 MB].
Other COVID-19-related tax reports
Need to find specific updates for states or other countries? Read a KPMG report [PDF 214 KB] for state and local tax guidance and tax relief in response to coronavirus (COVID-19).
To easily find reports by country, read KPMG’s COVID-19, Global Tax Developments Summary [PDF 487 KB].
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Ruth Madrigal | +1 202 533 8817 | ruthmadrigal@kpmg.com
Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com
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