IRS Help for Nonprofits During COVID-19: New Deductions, Tax Credits, and Loan Programs

Learn about new tax credits, loan programs, and changes to charitable deduction laws created to ease the impact of the COVID-19 crisis on nonprofits.

The U.S. economy suffered its steepest decline in modern history due to the coronavirus (COVID-19) pandemic. The nation's nonprofits suffered as much or more than for-profit businesses. Congress has acted to help.

Charitable Deduction Tax Changes

As the economy suffers, so does nonprofit fundraising. Congress made two important changes in the tax law in attempt to help nonprofits get donations.

Universal Charitable Deduction for 2020 and 2021

Ordinarily, charitable contributions are deductible only by taxpayers who itemize their personal deductions instead of taking the standard deduction. As a result of recent tax changes, today only about 10% of all taxpayers itemize their personal deductions. Thus, vast majority of individual taxpayers don't get any tax benefit from charitable contributions.

To help encourage charitable contributions during the pandemic, Congress added a temporary new $300 universal charitable deduction for cash contributions by nonitemizers to tax-qualified charities during 2020. The contributions must be made in cash to 501(c)(3) public charities. Contributions to nonoperating private foundations, support organizations, and donor advised funds don't come within the new deduction.

For 2021 only, the amount of the deduction is doubled to $600 for married couples filing jointly.

Nonprofits should let small contributors know that $300 (or $600) in contributions are deductible for 2021 and 2021 even if they don't itemize and ordinarily get no deduction for charitable contributions.

This deduction is scheduled to end after 2021, but it could be extended.

Congress also added to the tax law a new 50% penalty for taxpayers who cheat by taking this deduction without actually making the cash contributions they claim on their return.

2020-2021 Increase in Charitable Donation Limit

Under regular tax rules, the amount of charitable cash contributions taxpayers can deduct as an itemized deduction is limited to 60% of the taxpayer's adjusted gross income (AGI). For example, a taxpayer with an AGI of $1 million can deduct up to $600,000. In an effort to encourage large donations by wealthy individuals, Congress increased this deduction to 100% of AGI for cash deductions to qualified charities (not including donor advised funds). But this increase is for 2020 and 2021 only.

Sick Leave and Family Leave Tax Credits

The Family First Coronavirus Response Act signed into law on March 18, 2020 required employers with less than 500 employees, including nonprofits, to provide employees affected by COVID-19 with paid sick leave and family leave. It also included refundable tax credits to help them pay for such leave. Nonprofits with fewer than 50 employees could apply for an exemption from the requirements.

The sick leave and family leave program was originally scheduled to expire March 31, 2021. However, it has been extended through September 30, 2021 in slightly modified form.

  • Paid Sick Leave: Covered employers must provide up to 10 days (80 hours) of paid sick leave to employees who can't work or telework because they have to self-isolate or quarantine, are experiencing symptoms and need to obtain a diagnosis, have been exposed to COVID-19 and are unable to work pending test results, need to get vaccinated, or are recovering from a vaccination. Such employees must be given their regular pay.
  • Paid Family Leave: Covered employers are also required to provide eligible employees with up to 12 weeks of paid family and medical leave if an employee is unable to work or telework because they have to care for a son or daughter under 18 years of age whose school or place of care has been closed due to COVID-19; are caring for any person subject to a quarantine order, or are advised by a health care provider to self-quarantine.

Employers who provide such leave are entitled to a tax credit to help defray the cost. The credit is based on employee pay (including employer health insurance costs). The sick leave credit is capped at $511 per day. Thus, the maximum credit is $5,110. The family leave credit is capped at $200 per day. Thus, the maximum credit is $12,000. This a refundable credit--your nonprofit can collect the full amount even if it owes no taxes.

Employers don't have to wait until they file their taxes to get these credits. Instead, they can reduce the employer payroll taxes they must pay to the IRS during the year to cover the cost. Through March 31, 2021, the employer portion of Social Security payroll taxes may be reduced. Starting April 1, 2021 the employer portion of Medicare payroll taxes may be reduced.

If there are not sufficient payroll taxes to cover the cost of COVID-19 sick leave and/or emergency leave paid, employers may request for an accelerated payment from the IRS.

For more information, see the FAQs prepared by the IRS.

Employee Retention Credit

Previous COVID-19 relief legislation in 2020 created a new refundable employee retention credit designed to encourage employers not to lay off their employees during the pandemic. The old credit began March 13, 2020 and expired December 31, 2021. Congress created an expanded new retention credit for employees paid wages during January 1, 2021 through December 31, 2021.

A nonprofit is eligible for the new credit if it:

  • fully or partially suspends operations during 2021 due to a government order limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or
  • experiences a 20% or more decline in gross receipts during a calendar quarter in 2021 compared with the same quarter in 2019.

The new credit is equal to 70% of wages paid to each employee. Wages include health benefits. The maximum credit is $7,000 per employee per quarter. For nonprofit employers with more than 500 full-time employees in 2019, only wages paid to employees who are not working qualify for the new credit.

A nonprofit qualifies for the old credit for 2020 if it:

  • fully or partially suspended operations during a 2020 calendar quarter due to COVID-19, or
  • experienced a 50% or more decline in gross receipts during a 2020 calendar quarter compared with the same quarter in 2019, or a 20% decline for the first or second quarters of 2021 compared with 2019.

The old credit is equal to 50% of wages. The maximum amount for any employee is $5,000. For nonprofit employers with more than 100 full-time employees in 2019, only wages paid to employees who are not providing services qualify for the new credit.

This a refundable credit--your nonprofit can collect the full amount even if it owes no taxes.

From January 1, 2021 through June 30, 2021 nonprofit employers can deduct the amount of the new credit from the employer's portion of the Social Security tax they pay for each employee (a 6.2% tax up to an annual ceiling). The same rule applied to the old credit for 2020. Starting July 1, 2021 the new credit may only be deducted from the employer portion of the Medicare tax paid for each employee (a 1.45% tax on wages). Any remaining credit amount will be paid the business by the IRS after it files its tax return.

A nonprofit can qualify for this credit if it receives a Paycheck Protection Program (PPP) loan from the Small Business Administration. But wages paid with PPP loan proceeds can't be used to determine the credit amount.

For more information, see the FAQs prepared by the IRS.

SBA Loans and Grants

Low-interest loans and grants are available to help nonprofits that need a quick infusion of cash. These include SBA economic injury disaster loans (EIDL) and loans under the paycheck protection program (PPP). Any nonprofit with less than 500 employees can qualify for either or both loan programs. However, you can't use funds from each loan for the same expenses.

SBA Economic Injury Disaster Loans (EIDL)

Congress has added millions in additional funds to the Small Business Administration's Economic Injury Disaster Loans program. These are loans of up to $2 million have a 2.75% interest rate when made to nonprofits. Payments can be deferred for up to four years. Nonprofits impacted by the COVID-19 pandemic can also obtain EIDL grants from the SBA. These are grants up to $10,000 targeted to nonprofits and businesses in low-income communities. The grants are tax-free. You apply for EIDL loans and grants online at the Small Business Administration.

Paycheck Protection Program (PPP)

The SBA's most popular loan program during the COVID-19 pandemic has been the Paycheck Protection Program (PPP) loan program. Nonprofits can borrow up to 2.5 times 2019 or 2020 average payroll costs for all employees earning up to $100,000. You can borrow up to $10 million.

PPP loans proved so popular, Congress expanded the program to allow two separate loans: first round PPP loans and second round loans for those who already received a PPP loan. A nonprofit is eligible for a second round PPP loan only if it experienced at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

These are two-year loans with a 1% interest rate. However, the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities during an eight or 24 week after the loan is received. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

The PPP loan program has been extended through May 31, 2021. Your nonprofit must apply directly with participating banks and other lenders. Note that your nonprofit may obtain both an EIDL and PPP loan.

For more information, see the SBA Paycheck Protection Program page.

Shuttered Venue Operators Grants

Nonprofit live performing arts organizations and museums can qualify for an SBA shuttered venue operators grant. "Museum" includes aquariums, arboretums, botanical gardens, art museums, children's museums, general museums, historic houses and sites, history museums, nature centers, natural history and anthropology museums, planetariums, science and technology centers, specialized museums, and zoological parks.

The grant is equal to 45% of the nonprofit's 2019 gross earnings, up to $10 million. To qualify, the nonprofit must have suffered a 25% or greater revenue loss between one quarter of 2019 and the corresponding quarter of 2020.

The SBA is building the grant program and expects to open applications in early April. Those who have suffered the greatest economic loss will be the first applications processed.

For more details, visit the SBAs Shuttered Venue Operators Grant page.

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