GUIDANCE FOR SMALL BUSINESSES AND NOT-FOR-PROFIT ORGANIZATIONS
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was signed into law on December 27, 2020 as part of the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“2021 Appropriations Act”). The Economic Aid Act authorizes the Small Business Administration (“SBA”) to disburse an additional $284 billion of funds through the second temporary loan program called the Paycheck Protection Program Second Draw Loans (“PPP Second Draw Program”). Specifically, the PPP Second Draw Program allows borrowers that previously received a loan through the Paycheck Protection Program (“PPP First Draw Program”) (see here for an article dated April 4, 2020 for information on the PPP First Draw Program), to apply for a second loan (“Second Draw PPP Loans”). The intent of the PPP Second Draw Program is to provide additional relief to hard-hit small businesses, including qualified not-for-profit organizations.
The below will provide a high-level understanding of the PPP Second Draw Program.
- Eligible Entities: Eligible entities include businesses, certain not-for-profit organizations (including religious organizations), housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.[i] Congress has specifically included language clarifying that religious organizations are eligible to apply.[ii]
- General Requirements for Eligible Entities[iii]:
- Employs 300 or fewer employees per physical location;
- Experienced a reduction in gross receipts of at least 25% in the first, second or third quarter in 2020 compared to the same quarter in 2019. Borrowers may also utilize the gross receipts from the fourth quarter of 2020 (not-for-profit and veterans’ organizations may utilize gross receipts to calculate their revenue loss standard);
- Received a loan under the PPP First Draw Program; and
- Used or will use the full amount of the loan pursuant to the PPP First Draw Program on or before the Second Draw PPP Loan is disbursed.
- Maximum Loan Amount: $2 million which includes the loan amount received and not paid back under the PPP First Draw Program.[iv]
- Calculation of Loan Amount: Average monthly payroll costs for 2019 or 12 consecutive months prior to the loan application date multiplied by a factor of 2.5.[v] Compensation is capped at $100,000 per employee annually. For more information on the definition of “payroll”, see our article dated April 4, 2020 titled Economic Relief for Non-Profit Organizations Through the Paycheck Protection Program.
- Timeline: From January 13, 2021 (depending on the application process for each authorized lender) through March 31, 2021.[vi] Borrowers should apply as soon as possible because the funds will likely be depleted prior to March 31, 2021.
- Eligible Loan Expenses:
- Sixty Percent (60%) of the loan to be used on payroll costs over the covered period (between eight (8) and twenty-four (24) weeks)[vii];
- Covered expenses set forth in the guidelines for the PPP First Draw Program (payroll costs, mortgage payments, rental payments, utility payments)[viii]; and
- Additional covered expenses include but are not limited to: (a) payment of software or cloud computing services or other human resources needs and accounting needs. (i.e., purchase of Zoom, WebEx, Amazon Cloud, QuickBooks, etc.), (b) property damages costs from disturbance occurring in 2020 that are not covered by insurance, and (c) expenses for the adaptation of the entity to comply with CDC or other governmental regulations to be COVID-19 compliant.[ix]
- Loan Terms: Loan terms for Second Draw PPP Loans are generally the same as the terms applicable to PPP First Draw Program.[x] These terms include the following:
- Guaranteed 100% by the SBA;
- No collateral required;
- No personal guarantees required;
- The interest rate is 1%, calculated on a non-compounding, non-adjustable basis;
- The maturity is five (5) years; and
- Lenders may make such loans under delegated authority from the SBA and rely on borrower’s certifications to determine eligibility and use of loan proceeds.
- Loan Application: A sample application can be found through the SBA’s website here.[xi] However, it is important for borrowers to review the application and documentation required by their individual lender before submitting a loan application.
- Loan Forgiveness:
- Loans $150,000.00 or less: Borrowers submit a simplified one page certification attesting that the entity suffered the required revenue loss and has complied with PPP loan regulations for the use of the loan proceeds.[xii] However, borrowers are required to retain relevant employment records for four (4) years and other records for three (3) years.[xiii]
- Loans greater than $150,000.00: Borrowers will need to submit the same forgiveness application required under the PPP First Draw Program and documentation adequate to establish that the borrower experienced a revenue reduction of 25% or greater in 2020 relative to 2019.[xiv]
- Limitation on Number of Loans. An eligible borrower may only receive one (1) Second Draw PPP Loan.[xv]
GUIDANCE FOR FIRST TIME BORROWERS
The PPP First Draw Program has reopened for first-time borrowers to apply as of January 11, 2021. The rules for first-time borrowers under the PPP First Draw Program have generally adopted the same guidelines as the PPP Second Draw Program, with a few changes, including: (i.) the entity may employ 500 employees or fewer, (ii.) the maximum loan amount is $10 million, and (iii.) the calculation for payroll costs can be derived from 2019, 2020 or one (1) year before the date on which the loan is made.[xvi] The updated PPP First Draw Program loan application can be found through the SBA website here.[xvii]
ADDITIONAL RESOURCES & ARTICLES
Capell Barnett Matalon & Schoenfeld LLP has written comprehensive articles relating to the Paycheck Protection Program and the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), which may be relevant to your not-for-profit corporation or small business. See the below links for more information:
- April 4, 2020: Economic Relief for Non-Profit Organizations Through the Paycheck Protection Program.
- April 6, 2020: THE CARES ACT: Expansion of the Economic Injury Disaster Loans.
- April 22, 2020: Reimbursement for Mandated Sick and Family Leave Pay.
The SBA website also offers an array of helpful resources for first-time and second-time borrowers:
- January 08, 2021: Top-line Overview of First Draw PPP.
- January 08, 2021: Top-line Overview of Second Draw PPP.
- January 08, 2021: Loan Forgiveness Terms for First Draw and Second Draw PPP.
- January 06, 2021: Interim Final Rule: Paycheck Protection Program (PPP) as Amended by the Economic Aid Act.
The information in this article is continuously changing and being updated, and several details of the PPP Loans are yet to be announced by the U.S. Treasury and SBA. This publication is for informational purposes only and does not constitute legal or business advice. Each entity, based on its specific circumstances, must determine whether to seek and secure an SBA loan. In no way is Capell Barnett Matalon & Schoenfeld LLP advising that it is appropriate for all entities to seek such loans. This publication is not intended to create and the transmission and receipt of it does not constitute, a lawyer-client relationship. If your not-for-profit organization requires assistance, please contact Jodi Warren, Esq., at firstname.lastname@example.org or Alexandra Columbo, Esq., at email@example.com.
© 2021 Capell Barnett Matalon & Schoenfeld LLP. All rights reserved. Attorney advertising.
[i] Section 311 of the Economic Aid Act.
[vi] Section 343 of the Economic Aid Act.
[vii] Section 311 of the Economic Aid Act.
[ix] Section 304 of the Economic Aid Act.
[x] Section 311 of the Economic Aid Act. See also First Draw PPP Loans, https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program/first-draw-ppp-loans#section-header-2 (last visited January 14, 2021).
[xi] See SBA Form 2483-SD, https://www.sba.gov/document/sba-form-2483-sd-ppp-second-draw-borrower-application-form (last visited January 14, 2021).
[xii] Section 307 of the Economic Aid Act.
[xiv] Section 311 of the Economic Aid Act.
[xvi] See Top Line Overview of First Draw PPP issued by the SBA, https://www.sba.gov/document/support-top-line-overview-first-draw-ppp (last visited January 14, 2021).
[xvii] See SBA Form 2483, https://www.sba.gov/document/sba-form-2483-ppp-first-draw-borrower-application-form (last visited January 14, 2021).
What Non-Profit and Religious Corporations Need to Know
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) includes several provisions that enhance tax benefits for individuals and corporations that make qualified contributions to charitable organizations and shall apply to taxable years beginning after December 31, 2019. To encourage more charitable giving this holiday season, it may be helpful for non-profit corporations, including certain religious corporations, to make their members and congregants aware of the tax incentives provided to individuals and corporations, and review section 2204 and section 2205 of the CARES Act.
QUALIFIED CONTRIBUTIONS & ORGANIZATIONS
Section 2205 of the CARES Act defines a “qualified contribution” as a gift or charitable contribution that is: (i.) made in 2020; (ii.) paid in cash; and (iii.) made to certain organizations promulgated in Internal Revenue Code (“IRC”) section 170(b)(1)(A). These charitable organizations include but are not limited to, churches, hospitals and other section 501(c)(3) charitable organizations, among others listed in the IRC. Contributions made to organizations under IRC section 509(a)(3) and contributions made “for the establishment of a new, or maintenance of an existing, donor advised fund” do not qualify. The paid in cash requirement is construed strictly and donations of stock, real estate or other non-cash types of property are specifically excluded from the definition of a “qualified contribution”. Cash donations include those made by check, credit card or debit card.
TAX DEDUCTIBLE DONATIONS
a. Above-the-line Deduction
The CARES Act adds a new above-the-line deduction, available in tax years beginning after December 31, 2019, for up to $300 for cash contributions made directly to a qualified charitable organization. As an additional above-the-line deduction, it does not subtract from the standard deduction. This additional deduction lowers both adjusted gross income and taxable income, which translates into tax savings for donors who make these cash contributions in 2020. This new deduction cannot be used by an individual who elects to itemize deductions, as their charitable contributions will be reported elsewhere.
b. Limitation on Charitable Contributions
In accordance with IRC section 170 (b)(1), deductions for cash contributions to public charities are capped at sixty percent (60%) of the individual’s annual adjusted gross income. Organizations that are classified as public charities include certain churches, educational organizations, hospitals, and medical research organizations. The CARES Act suspends this limitation, allowing donors to claim up to one hundred percent (100%) of their adjusted gross income as a charitable contribution for cash gifts. If charitable contributions from an individual – as opposed to a corporation – exceeds the one hundred percent (100%) limitation, the excess contribution can be carried over for the next five (5) tax years.
2. Corporations Corporate deductions for charitable contributions are usually limited to ten percent (10%) of taxable income, pursuant to IRC section 170(b)(2). The CARES Act increases this limitation to twenty-five (25%) of a corporation’s taxable income for qualified cash contributions made in taxable years ending after December 31, 2019. For partnerships or S corporations, the increased contribution deduction must be made separately by each partner or shareholder similarly to other deductions made by such entities. If a corporation’s charitable contributions exceed the twenty-five percent (25%) limitation, the excess contributions may be carried over for the next five (5) tax years.
3. Food Inventory The CARES Act also modifies the cap on permitted deductions for contributions to food inventory (i.e., food pantries), by increasing the deduction limit of individuals and corporations to twenty-five percent (25%) of taxable income, rather than the earlier fifteen percent (15%).
ADDITIONAL RESOURCES FROM THE INTERNAL REVENUE SERVICE (“IRS”)
The IRS has provided a list of resources for individuals and corporations interested in making these donations and receiving these tax benefits. The below links may be helpful for your non-profit corporation and religious corporation during this holiday season to encourage donations:
- Tax Exempt Organization Search (TEOS). Taxpayers must give to qualified organizations to deduct their donations on their tax return. They can use this tool to find out if a specific charity qualifies as a charitable organization for income tax purposes. Click here.
- Schedule A, Itemized Deductions. Taxpayers deducting donations do so on Schedule A. The instructions for this form include line-by-line directions for completing it. Click here.
- Publication 526, Charitable Contributions. This publication explains how taxpayers claim a deduction for charitable contributions. It goes over: (i.) how much taxpayers can deduct; (ii.) what records they must keep; and (ii.) how to report contributions. Click here.
The information in this article is continuously changing and being updated. This article is for informational purposes only and does not constitute legal or business advice. In no way is Capell Barnett Matalon & Schoenfeld LLP advising that it is appropriate to only follow the information listed here. If your religious corporation or non-profit organizations requires assistance, please contact Alexandra Columbo, Esq. at AColumbo@cbmslaw.com.
© 2020 Capell Barnett Matalon & Schoenfeld LLP. All rights reserved. Attorney advertising.
The CARES Act Section 2205(a)(3)(A)(i)
The CARES Act Section 2205(a)(3)(B)(i)-(ii)
The CARES Act Section 2204(a)
The CARES Act Section 2204(b)
IRC Section 170(b)(1)(G)(i)
The CARES Act Section 2205(a)(1)
The CARES Act Section 2205(a)(2)(A)(ii)
IRC Section 170 (b)(2)
The CARES Act Section 2205(a)(B)(i)
The CARES Act Section 2205(a)(3)(C)
The CARES Act Section 2205(a)(2)(B)(ii)
The CARES Act Section 2205(b)
IRC Section 170(e)(3)(C)
Capell Barnett Matalon & Schoenfeld Partner, Robert Barnett was published in the December issue of the Journal of Taxation for his article Discrimination Settlements – Income Tax Considerations. The article reviews the general rules related to taxation of discrimination settlement awards and how federal statutory changes affect negotiation and drafting of the settlement agreement.
Click Here to read the full article!
CBMS Associate Jodi Warren was just published in the New York Real Estate Journal for her article How can not-for-profit and religious corporations prepare to enter into a real estate transaction? Check out the five key due diligence steps that every not-for-profit and religious corporation should focus on before embarking on a real estate project and, specifically, a transaction involving development or construction.
Congrats to our partner, Yvonne R. Cort on being a Top 50 Women in Business honoree! The award recognizes Long Island’s top women professionals for their business acumen, mentoring and community involvement. The program’s honorees are selected by a judging committee and represent the most influential women in business, government and the nonprofit fields. For a full listing of Long Island Business News 2020 award winners, click the link below.
There’s a new twist on an old problem: how to stay current with withholding tax obligations. Prudent employers know that the company’s cash flow must be able to manage full timely payment to the taxing authorities of all taxes due. An employer who does not pay the full balance due on a Form 941 could be personally liable to the Internal Revenue Service for the trust portion.
Recent presidential action has increased the potential exposure for employers, by allowing a “payroll tax holiday”. This holiday may be fun for the employee while it lasts, but could cause major problems for both the employee and the employer when the holiday is over.
The executive order, issued August 8, 2020, applies to workers whose biweekly pay is under $4000, pre-tax. The order defers payment of the employee share of Social Security, from Sept. 1, 2020, through Dec. 31, 2020. Last minute guidance issued by the IRS on August 28, 2020, only a few days before the order took effect, clarifies that the employer is responsible for deferring the tax, and later paying it to the IRS by April 30, 2021. If the deferred amounts are not paid in full by April 30, 2021, penalties and interest will begin to accrue. Note that implementing the payroll tax deferral is elective, not mandatory.
The IRS guidance provides that the employers who choose to defer the tax in 2020, must withhold and pay the deferred taxes ratably from compensation and wages paid to the employee between January 1, 2021 and April 30, 2021. If necessary, the employer may “make arrangements to otherwise collect the total [taxes] from the employee”. It is unclear how this will be handled if an employee is no longer working for the employer after December 31, 2020. Moreover, employees may not realize that their net paychecks in 2021 will be smaller than usual, potentially leading to serious hardship.
The employer remains on the hook for the deferred payroll taxes, regardless of whether the taxes are taken out of the employee’s wages in the spring. Failure to pay the deferred tax could result in personal liability of the owner, director, or shareholder of the employer, or other responsible individuals.
Pursuant to Internal Revenue Code Section 6672, the IRS can assert the trust fund recovery penalty against an individual who is under a duty to collect and pay over the withheld income or employment taxes, and fails to do so. There are numerous factors to be reviewed in determining who is responsible. Some of the factors considered by the IRS are the individual’s title and position in the company, authority or control over how funds are disbursed, signatory authority for checks, and ability to hire and fire employees. The person must also have acted willfully, with intent or intentional disregard, in failing to pay the taxes. The IRS will find intent or willfulness if the “responsible person” knowingly paid other expenses while the taxes remained unpaid.
Trust fund recovery penalties, also known as civil penalties, are particularly harsh in their effect. Multiple individuals could be assessed; personal assets can be seized including bank accounts, retirement accounts and real property; and liens are filed, which affect the ability to refinance or sell one’s home, among many other ripple effects. The trust fund recovery penalties are assessed even if the business closes – in fact, especially if the business closes, as the IRS seeks to recover the unpaid trust tax from a different, deeper pocket. Assessments against individuals for trust tax are not dischargeable in bankruptcy.
Tax professionals should be aware of the risks to their business clients, when advising whether the employer should take advantage of the payroll tax deferral for its employees. For the employer, rather than an enjoyable “holiday”, there could be serious consequences.
Yvonne R. Cort is a partner at the law firm of Capell, Barnett, Matalon & Schoenfeld, LLP. Her practice is focused on assisting businesses and individuals in resolving complex IRS and NYS tax issues including audits and collection matters. Yvonne is a frequent speaker for accounting and legal professional groups. She can be reached at firstname.lastname@example.org
Partner Gregory Matalon featured on The Business Journal’s Mass Mutual Business Owner’s Perspective Podcast
CBMS Partner Gregory Matalon was a guest on “The Business Journal’s Mass Mutual Business Owner’s Perspective Podcast” with Brian Bushlack. Many business owners don’t have a succession plan or estate plan in order. Without a plan, the business and business owner’s family may suffer. Click the link below to listen and learn more about the importance of planning.
On July 22, 2020, Capell Barnett Matalon & Schoenfeld LLP partner Yvonne Cort was quoted in Bloomberg Law regarding NYS Residency Issues, in an article entitled “New York’s Taxes Will Stalk You Even If You Fled During the Pandemic”. Click here for full article
In these days of working from home, many New York State resident taxpayers fortunate enough to have a vacation place are spending more time than ever before in their second home. There are also anecdotal reports of snowbird New Yorkers remaining south longer this year due to travel concerns. For some taxpayers, the question arises: why pay New York taxes when I’m living out of state? However, under NYS tax law, a resident taxpayer does not relinquish NYS residency simply by staying in another state. The taxpayer must meet NYS standards for changing domicile – and have the documentation to prove it if audited by New York State.
Let’s start with the basics. There are two ways for an individual to be taxed as a resident of New York: (1) when domiciled in New York; or (2) as a statutory resident of New York. A statutory resident is defined as an individual who is not domiciled in NYS, has a permanent place of abode in NYS and spends more than 183 days of the taxable year in NYS. Note that similar rules apply for determining New York City residency.
Many taxpayers who are domiciled in New York and spend vacations or winter in a second home erroneously believe that if they are out of New York for 6 months of the year, and make a few minor changes, such as obtaining a driver’s license in the new state, they will no longer be subject to tax as a NYS resident. They don’t realize that they may not have changed their domicile, and therefore the statutory resident test cannot be applied.
While a taxpayer may have multiple residences, there can be only one domicile. To change domicile, the taxpayer must have the intent to abandon the old domicile, and make the new place “home”, with all the feeling and sentiment associated with that word. The taxpayer can continue to maintain a residence in New York after changing domicile – but it won’t be “home”.
In considering a change of domicile, the State evaluates five primary factors: size, nature and use of the residence; active business involvement; time spent in each place; location of items near and dear; and family connections. The taxpayer must show, by clear and convincing evidence, that the ties to the new domicile out of New York are stronger and the connections to New York have become much weaker or been severed. While the State will place some value on minor factors such as obtaining a driver’s license or registering to vote, these do not carry as much weight as the primary factors.
Due to today’s COVID19 restrictions, taxpayers may have a better chance of demonstrating more time spent in the proposed new domicile than in the old place. It’s important to recognize that this is only one factor in showing a change of domicile, and no one factor is determinative. And if NYS starts an audit, often a year or two after the tax return is filed, the location where time was spent during the pandemic will be viewed in the context of prior and subsequent years. If the COVID19 time in the out-of-state residence is an outlier, and there have been no other changes, it may be difficult to show that the taxpayer’s home is no longer in New York.
To effectively prove a change of domicile, taxpayers should be mindful of New York State’s requirements and take steps contemporaneously to document all the supporting factors as much as possible. When New Yorkers are considering a change of domicile, they need to know that there’s more to be done than spending more time in their second home.
The information in this article is continuously changing and being updated. This article is for informational purposes only and does not constitute legal or business advice. In no way is Capell Barnett Matalon & Schoenfeld LLP advising that it is appropriate to only follow the information listed here. If you or your business requires assistance, please contact Yvonne Cort, Esq. at email@example.com