PANDEMIC | How Nonprofits Are Helped by the CARES Act

In the Trenches against
the Coronavirus.

March 28, 2020–Two weeks ago the White House and the Centers for Disease Control and Prevention (CDC) seemed to be on the front line of the U.S. defense against the novel coronavirus, aka COVID-9.

But we in New York State are more focused at this point on the daily briefings of Governor Andrew Cuomo. What matters to us is our theater of the war and the specifics of the progress of the war. The Governor is the one matching hospital beds and PPE and ventilators and staff to where they are most needed to slow down the spread of the disease.

The trenches in this war are the hospitals, their emergency rooms (ERs) and intensive care units (ICUs). Many of these hospitals are nonprofit organizations, as are employers of home health care and visiting nurses groups, which are nonprofits. Often they get left out of laws, as they were in the case of the Tax Act of 2017.  Rep. Carolyn Maloney (D-NY12) wrote a bill last year to rectify the situation; it is H.R. 3323, the Nonprofit Relief Act, now with the House Ways and Means Committee.

So I was curious how the nonprofits fared with the new $2 trillion relief. The National Council of Nonprofits has prepared an excellent summary of the law as it applies to all nonprofits (i.e., charitable foundations with 501-c-3 status under IRS regulations), and I can do no better than to show their analysis below. I do so with their permission:

Coronavirus Aid, Relief, and Economic Security Act 

CARES Act (Pub. L. 116-132)

On Friday, March 27, the House unanimously passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion economic stimulus law intended to provide immediate relief for individuals, nonprofits, businesses, and state and local governments. The CARES Act is the third law enacted in response to the COVID-19 pandemic.

What’s in the Act for Nonprofits

The CARES Act provides significant funding for governments, businesses, hospitals, schools, and social support programs. Below are key provisions of sector-wide interest to charitable nonprofit organizations.

Paycheck Protection Program Loans (emergency SBA 7(a) loans): Creates an emergency loan program providing loans of up to $10 million for eligible nonprofits and small businesses, permitting them to cover costs of payroll, operations, and debt service, and provides that the loans will be forgiven in whole or in part under certain circumstances. Section 1102.

• General Eligibility: Available to entities that existed on February 15, 2020 and had paid employees or paid independent contractors.
• Nonprofit Eligibility: Available for charitable nonprofits with 500 or fewer employees (counting each individual – full time or part time and not FTEs). The law does not disqualify nonprofits that are eligible for payments under Title XIX of the Social Security Act (Medicaid), but does require that employees of affiliated nonprofits may be counted toward the 500 employee cap, depending on the degree of control of the parent organization.
• No Personal Guarantee: No personal guarantee or collateral will be required in securing a loan.
• Loan Amount: The lesser of $10 million or 2.5 times the average total monthly payroll (including benefits) costs from the one-year period prior to the date of application.
• Loan Use: Loan funds can be used to make payroll and associated costs, including health and retirement benefits, facilities costs, and debt service.
• Loan Forgiveness: Employers that maintain employment for the eight weeks after the origination of the loan, or rehire employees by June 30, would be eligible to have their loans forgiven, essentially turning the loan into a grant. Section 1106.

Economic Injury Disaster Loans (EIDL): Creates emergency grants for eligible nonprofits and other applicants with 500 or fewer employees enabling them to receive checks for $10,000 within three days. Section 1110. (The National Council of Nonprofits has posted a side-by-side comparison of the loan programs.)

Self-Funded Nonprofits and Unemployment: Only reimburses self-funded nonprofits for half of the costs of benefits provided to their laid-off employees. This is explained in a recent blog article. Section 2103.

Charitable Giving Incentive: 

- Creates a new above-the-line deduction (universal or non-itemizer deduction that applies to all taxpayers) for total charitable contributions of up to $300. The incentive applies to cash contributions made in 2020 and can be claimed on tax forms next year. Section 2204. 

- The law also lifts the existing cap on annual contributions for those who itemize, raising it from 60 percent of adjusted gross income to 100 percent. For corporations, the law raises the annual limit from 10 percent to 25 percent. Food donations from corporations would be available to 25 percent, up from the current 15 percent cap. Section 2205.

                                         

Employee Retention Payroll Tax Credit: Creates a refundable payroll tax credit of up to $5,000 for each employee on the payroll when certain conditions are met. The entity had to be an ongoing concern at the beginning of 2020, experienced a whole or partial shutdown, and had seen a drop in revenue of at least 50 percent in the first quarter compared to the first quarter of 2019. The availability of the credit would continue each quarter until the organization’s revenue exceeds 80 percent of the same quarter in 2019. For tax-exempt organizations, the entity’s whole operations must be taken into account when determining eligibility. Notably, employers receiving Paycheck Protection Program loans would not be eligible for these credits. Section 2301.

Delayed Payment of Payroll Taxes: Allows employers to delay payment of the employer portion payroll taxes in 2020; payable in equal halves at the end of 2021 and 2022. Section 2301.

Economic Stabilization Fund: Creates a loan and loan guarantee program for industries like airlines to keep them solvent through the crisis. It sets aside $454 billion for “eligible business” which is defined as “a United States business that has not otherwise received economic relief in the form of loans or loan guarantees provided under” the legislation. It is expected, but unclear, whether charitable nonprofits qualify under that definition for stabilization loans. Mid-sized nonprofits and businesses that have between 500 and 10,000 employees are expressly eligible for loans under this provision. Although there is no loan forgiveness provision in this section, the mid-size business loans would be charged an interest rate of no higher than two percent and would not accrue interest or require repayments for the first six months. Nonprofits accepting the mid-size business loans must retain at least 90 percent of their staff at full compensation and benefits until September 30.  Section 4003.

Other Significant Provisions of the CARES Act

Direct Payments to adults of $1,200 or less and $500 per child ($3,400 for a family of four) to be sent out in weeks. The amount of the payments phases out based on earnings of between $75,000 and $99,000 ($150,000 / $198,000 for couples). Section 2201.

Expanded Unemployment Insurance: Includes coverage for workers who are furloughed, gig workers, and freelancers. Increases payments by $600 per week for four months on top of what state unemployment programs pay. Section 2104.

Amendments to the New Paid Leave Mandates: Lowers the amounts that employers must pay for paid sick and family leave under the Families First Coronavirus Response Act* (enacted March 19) to the amounts covered by the refundable payroll tax credit – i.e., $511 per day for employee sick leave or $200 per day for family leave. Sections 3601 and 3602.

Significant Spending: The law also calls for large infusions of cash to the following sectors:

• $150 billion for a state, tribal, and local Coronavirus Relief fund
• $130 billion for hospitals
• $30 billion for education
• $25 billion for transit systems

Legislative Resources

• Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748 legislative text
• A section-by-section for unemployment insurance and tax policy
• A section-by-section for health policy
• A section-by-section for appropriations
• A section-by-section for banking policy

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* See: Analysis of the Families First Coronavirus Response Act. Also, browse the National Council of Nonprofits collection of resources for nonprofits dealing with the impact of COVID-19.

JOBS | Which David Brooks Should We Listen To?

David Brooks tackles every problem with earnestness and when he figures out the answer he expresses his dismay, often enough that Congress doesn't get it or hasn't acted.

In his Op-Ed today, he is on to the low labor force participation rate, the "lowest in decades".

He has read another book and he is distraught at the options facing young people: "Millions are in part-time or low-wage jobs that don’t come close to fulfilling their capacities. Millions more are in dysfunctional or unhealthy workplaces, but they don’t feel they can leave."

Transcending his University of Chicago roots, he favors favors a crash program of infrastructure investment.

The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling...

He warns Congress that young people are watching.

[O]ver the past five years, the political class has done essentially nothing. That will fill future generations with astonishment and should fill the current generation with rage... 

It makes sense to me. Borrowing resources today is appropriate to pay for the infrastructure needs of the future, just so long as the projects themselves are worthwhile. This was President Obama's intent when he came into office in 2009, to use stimulus money to accelerate state and local "shovel-ready" projects.

But nearly two and a half years ago Brooks was distressed at our era of indebtedness. He was appalled that any generation would "borrow money from the future to spend on itself". His article pillories debt of all kinds - Federal, state, local, business, personal. The title of his Op-Ed piece is "The Debt Indulgence".

Mr. Brooks, you are a reasonable person and you are seriously trying to come up with answers to big problems. But if we borrow to create jobs for our young people, won't we just be indulging ourselves in more debt?

OBAMA | Please Fund Tech Innovation (SBIR, DARPA)

My friend Professor Henry Etzkowitz was very helpful when I was working on a study of the software industry in New York City in 1999. Our work can be found here. He is an expert on the history of science and serves as Chair of the Management of Innovation, Creativity and Enterprise Program at the Newcastle University Business School.

Henry and I met recently in New York City to talk about President-elect Obama's stimulus program. This will be a gigantic investment in America's future. Should the Obama Administration use a portion of this funding to spur technological innovation? Or is this "picking winners" and is that a bad thing?

Those who oppose the government's picking winners argue that this is not the job of government and government employees have no expertise in culling business ideas and plans. So government's role has mostly been to lend money through programs like the Small Business Investment Company program, and leave it to private SBIC managers to pick among the possible investments.

Henry sent back to me some followup thoughts. I am excerpting, with his permission, some highlights of his thesis that the U.S. government has actually played a big and successful role in picking technological winners and that this role should be expanded.

The SBIR Program. The Small Business Innovation Research (SBIR) program has been a success, Henry says, in supporting high-tech firms.

SBIR was begun by program officers at the National Science Foundation (NSF) in the early 1980's. SBIR extended NSF's research programs by setting aside a relatively small percentage of research budgets, to support projects that demonstrate potential commercial as well as scientific merit. Researchers apply for SBIR grants and use them as the first step toward firm-formation, moving research ideas forward to commercialization.

In effect SBIR has served as a form of public venture capital, filling some of the gap, the so-called "Valley of Death" that business angels and private venture capital firms are typically unwilling to enter until a firm has proven itself through demonstrated earnings. Government has provided the seed capital to take many nascent firms to the point of private sector take-up. But government is not doing this task by itself. It relies on experienced private sector technology experts to serve as peer reviewers to judge the commercial potential of the new technology even as it continues to rely on academics to certify its scientific and technological potential. SBIR was extended from NSF to all government agencies with research budgets of more than $100 million.

The ATP. The European Union created Framework Programs to support collaborative industrial research, led usually by large firms. The U.S. response to this was the Advanced Technology Program (ATP) initiated during the Bush 41 presidency.

Opposition to the ATP led to a scale-down of grants, from tens of millions to large-firm led consortia to the low millions for innovative start-ups. This unintended consequence of reduced appropriations turned ATP into a useful follow-on to the SBIR, helping start-ups with new technologies through the "Valley of Death," the gap between government R&D funding and venture capital take-up. ATP is currently in "deep freeze" in the National Institute of Science and Technology, its sponsoring agency, receiving no new funds in recent years.

The ATP could be revived and SBIR could usefully be scaled up further, but the individual projects it supports are a necessary but insufficient technology policy for the current crisis. Larger scale initiatives are necessary to take advantage of the opportunity crisis offers to renew existing industries and create new techno-economic paradigms as the basis for future industries.

DARPA. The SBIR-ATP approach is relatively laissez-faire, choosing among competing ideas that arrive in response to general requests or over-the-transom proposals. The more tightly focused and directed approach is taken by the Defense Advance Research Projects Agency (DARPA). Under its demilitarized name ARPA, DARPA created the ARPANET as a communications system without a center, the origin of the Internet. DARPA's primary strength is its program-officer networks.

The DARPA officer is a highly skilled broad-gauge technologist, often a visionary drawn from a university, like psychologist J.C.R. Licklider who envisioned a new format for computer communication that led to the Internet. Following the DARPA format, invented in response to the Sputnik shock of the late 1950's Licklider had the freedom and the resources to establish a consortium of firms and universities to realize his vision.

The DARPA program officer, a public entrepreneur, is the key to the DARPA model. He or she has the resources and capability to fashion a technology development team from across university, industry and government laboratories and the remit to carry it from "blue sky" research all the way to commercialization and use. More recently a DARPA data-mining initiative provided the research resources and objective that provided the framework for the invention of the Google algorithm. Although DARPA is limited to achieving military goals, many of its initiatives have had significant spillover into the civilian economy. There have been various proposals for a civilian DARPA over the years but the political will has been lacking. Only military objectives have been granted an exemption from the dictum of government's supposed inability to pick winners. The current downturn offers a pressing opportunity to utilize this successful response to Sputnik to achieve broader socio-economic objectives. These models of R&D success, with mixed university-industry government elements and joint leadership, provide exemplars to creating a sustainable path to renewal, without relying on reviving past bubbles or inventing new ones.

As the Obama Administration seeks to maximize the long-term benefit from its stimulus funding, it should consider stepping up support of SBIR-ATP-DARPA initiatives.