Armanino Blog

Tax Alert: Nonprofit Guidance on Self-Funded Unemployment, Main Street Lending Program and Faxing Amended Refund Claims

May 05, 2020

Last week, there were a number of pronouncements from various government agencies that impact nonprofits. The U.S. Department of Labor, the Federal Reserve, and the Internal Revenue Service issued guidance for nonprofit organizations regarding the eligibility or impact of certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  Here is a summary of the updates in three key areas:

Reimbursement of Self-Funded Unemployment Benefit Payments

With the issuance of the Unemployment Insurance Program Letter (UIPL No. 18-20) on April 27, 2020, the U.S. Department of Labor's Employment and Training Administration provided states with instructions for implementing the emergency unemployment relief for self-funded nonprofit organizations (CARES Act section 2103). This is significant since nonprofit organizations described in Internal Revenue Code section 501(c)(3) are exempt from federal unemployment tax withholding, but rather, they pay for unemployment on a claims-made basis (reimbursing employers).

Section 2103 of the CARES Act amended section 903 of the Social Security Act and authorizes transfers from the Federal Unemployment Account to a state's account in the unemployment trust fund and requires the state to exclusively use the fund to reimburse nonprofit employers up to 50% of the amount of the compensation and benefits paid to employees who were laid off. The partial reimbursements apply to all payments made in lieu of contributions for weeks of unemployment beginning on or after March 13, 2020, and ending on or before December 31, 2020, regardless of whether unemployment resulted from COVID-19. However, the guidance requires nonprofit employers to pay the bill in full and seek the 50% reimbursement from their respective states. States can be penalized for providing more than 50% relief to the nonprofit organizations.

The impact on reimbursing nonprofit employers may be significant for many nonprofits, as they are asked to pay claims up front from reserves that may no longer exist and then wait for the state bureaucracies to work through a newly created reimbursement process. Congress would need to step in to resolve the issue, and the nonprofit community is beginning to speak out to request action before it's too late.

The Main Street Lending Program

Administered by the Federal Reserve, the Main Street Lending Programwas implemented to provide $600 billion in non-forgivable loans to small and mid-sized businesses (15,000 or fewer employees). The Main Street loans are full-recourse and determined based on the eligible borrower's adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). Nonprofit organizations generally don't evaluate the adjusted EBITDA and are currently not eligible under the program. Speaker Pelosi sent a letter to Democratic colleagues on April 14 requesting consideration of nonprofit inclusion in the program.

On the other hand, the Fed and the Treasury Department recognized the urgent loan support needs for nonprofit organizations and announced that they are evaluating whether they could adjust the borrower eligibility criteria and loan eligibility metrics of the program to allow nonprofit organizations to participate. There is still also the possibility that the Fed will issue a separate loan program tailored to nonprofit organizations.

Filing of a Refund Claim

On April 30, 2020, the IRS updated its set of frequently asked questions (FAQs) addressing how taxpayers can file applications for eligible refund claims. In order to make the relief in the CARES Act available to taxpayers before the IRS processing centers reopen, the IRS has established temporary procedures to fax certain Forms 1139 and 1045 (quick refund claim forms). However, a nonprofit organization cannot fax an amended Form 990-T to claim the refund. The organization must mail an amended Form 990-T to the address shown in the instructions for Form 990-T, and it may attach a Form 1139 or 1045 to the amended Form 990-T to show the computation and request the refund.

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