Tax-Exempt Organizations in the Age of COVID-19

The COVID-19 crisis presents unique challenges, as well as opportunities, for tax-exempt organizations. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act provides some relief to tax-exempt organizations who may be experiencing difficulties funding their operations and charitable projects as a result of the current situation. In addition, the Internal Revenue Service has postponed tax filing and tax payment deadlines, updated certain filing requirements and issued important proposed regulations.

The following significant developments may be of interest to tax-exempt organizations and to those individuals who support them.

• Paycheck Protection Program: Organizations qualified as tax-exempt under Section 501(c)(3) that have 500 or fewer employees may be eligible for an SBA (7(a)) loan of up to $10,000,000. The loan may be used to pay employee compensation of up to $100,000 per employee (or independent contractor) in order to keep employees on the payroll and independent contractors engaged throughout the COVID-19 crisis. If used within certain guidelines, the loan may eligible for complete forgiveness, provided at least 75% of the loan is used for compensation and the remaining 25% is used for other permitted obligations (such as rent).

The initial $349 billion allocated for such “PPP” loans ran out in less than two weeks. On April 24, 2020, however, the President signed a bill providing an additional $310 billion for the loan program. Given the high demand, we recommend that loan applications be submitted as soon as possible.

• Higher Limits on Deductions for Personal Charitable Contributions: Individuals and married couples filing jointly who do not itemize deductions on their income tax returns may deduct up to $300 of cash contributions made to public charities in 2020. In addition, taxpayers who itemize deductions may deduct 100% of their cash contributions to public charities. This unlimited deduction does not apply to contributions to donor advised funds, supporting organizations or private foundations.

• Extended Filing Deadlines for Tax-Exempt Organizations: Filing deadlines have been postponed to July 15th for Forms 990, 990-PF, 990-EZ and 990-N, (including Form 990-T or Form 4720 if required) and any schedules to those forms.

• Excise Tax Payment Relief for Private Foundations: Payment of certain excise taxes due on or after April 1, 2020, and before July 15, 2020, has been postponed to July 15, 2020. Specifically, the excise tax payments on investment income reported on Form 990-PF, and other excise tax payments reported on Form 4720, have been postponed.

• E-Filing Requirements for Tax-Exempt Status: To qualify as tax-exempt, an organization is required to file an Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Form 1023). The Internal Revenue Service now requires that Form 1023 be filed electronically. More information can be found on the IRS website, here.

• Unrelated Business Taxable Income (“UBTI”): On April 23, 2020, the Internal Revenue Service published proposed regulations under the 2017 Tax Cuts and Jobs Act (“TCJA”). Among other important provisions, the proposed regulations would assist tax-exempt organizations subject to UBTI in determining whether they have more than one unrelated trade or business, and, if so, how to calculate their UBTI for tax reporting purposes. More information (including a link to the proposed regulations) can be found on the IRS website, here.

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The COVID-19 pandemic has caused tremendous upheaval for tax‑exempt organizations. Staffing and delivery of services in the current environment can be extremely challenging. Some organizations may find it difficult to collect pledges or other contributions. Other organizations may find that the current environment presents unique opportunities to increase funding for certain projects and/or to expand the provision of charitable services. Now is a time for tax-exempt organizations to carefully consider potential changes to their operations and funding of charitable projects.

As we continue to monitor developments in this area, we may provide additional updates from time to time. Please contact your Kleinberg Kaplan attorney to discuss any questions you may have.