On Friday, November 12, Governor Hochul signed S4817A, repealing certain recently enacted amendments to N.Y. Exec. Law § 172-b that  (a) imposed duplicative and burdensome filing requirements on charitable organizations and (b) required public disclosure of previously confidential information about their donors.

Charities that were required to register and file an annual statement on Form CHAR 500 with the New York Attorney General’s Office (Charities Bureau) are still required to do so.  However, for most charitable organizations, S4817A eliminates the redundant requirement that they also file their annual statement with the New York Department of State.

501(c)(4) organizations must still file a Financial Disclosure Report with the New York Department of State if they spend more than $10,000 in a calendar year on one or more written lobbying communications, conveyed to 500 or more people. Similarly, 501(c)(3)s that make in-kind donations worth $10,000 or more to certain 501(c)(4)s will also be required to file a Funding Disclosure Report with the New York Department of State, though this scenario seems quite rare.

The bill also repeals the recently enacted requirement that the New York Department of State publish on its website donor information contained on Schedule B of the IRS Form 990, and codifies that Schedule Bs provided to the state as part of the above reporting requirements are not a public record.

S4817A had the strong support of many nonprofit and advocacy organizations throughout New York.

Click here to read our previous blog post on A1141A/S4817A.

The National Association of State Charity Officials (“NASCO”) recently published the Survey of State Laws Governing Registration of Charities as of July 2021.  In general, prior to soliciting donations from the residents of any state, and, in some cases, simply by virtue of holding assets or conducting activities in a particular state, charities must register and make annual filings with that state, and this survey is a useful reference chart for understanding each state’s requirements and exceptions.

NASCO is an association of the state agencies responsible for overseeing charitable organizations and charitable solicitation in the United States.  The requirements and procedures for forming charitable organizations differ from state to state, as do the registration and filing requirements for organizations that conduct charitable activities or solicit charitable contributions.

The survey is intended to assist charities in navigating state registration requirements, and provides state-specific information including: state agency contact information; initial registration requirements; annual registration and renewal requirements; and whether registration can be completed online.

Charities should work with counsel as needed to understand the requirements of each state in which they solicit donations, hold charitable assets, or conduct activities, to ensure a compliance program is in place to satisfy those requirements.  For each donation received, charities should keep track of the amount of such donation and where the donor resides, among other information, so that they can determine if and when registration in a particular state may be required.

Effective July 30, 2021, the New York Attorney General’s Charities Bureau has suspended its collection of Schedule B to IRS Form 990 while it reviews possible amendments to its forms, policies, or procedures that may be necessary in order to comply with the U.S. Supreme Court’s recent decision in Americans for Prosperity Foundation v. Bonta.

The notice posted to the Charities Bureau’s website states that “charities’ annual filings will no longer require disclosure information that identifies donors. Any notices that charities have received regarding any deficiency due to missing or incomplete Schedule Bs are no longer operative as to such deficiency, and annual filings will no longer be considered deficient in such regard.”

The July 1 Supreme Court ruling in Americans for Prosperity Foundation v. Bonta held that California’s requirement that charities operating or fundraising in California file Schedule B to their IRS Form 990, which discloses the names and addresses of their major donors, with the California Attorney General unconstitutionally infringes on charities’ and donors’ free speech and association rights in violation of the First Amendment. Click here to read our previous blog post on the Supreme Court decision.

New York and New Jersey are now facing a similar legal challenge to their Schedule B collection. On July 14, the Liberty Justice Center sued the New York and New Jersey Attorneys General, arguing that the states’ laws that require nonprofits to disclose tax documents that contain private information about their donors is unconstitutional. The suits were filed in the U.S. District Court for the Southern District of New York (available here) and the U.S. District Court for the District of New Jersey (available here).

On June 9, 2021, U.S. Senators Angus King (I-Maine) and Chuck Grassley (R-Iowa) introduced the Accelerating Charitable Efforts Act (the “Act”) which, if adopted, would revise current laws dictating the pace and transparency of resources flowing from private foundations and donor advised funds (“DAFs”) through a series of incentives and penalties. A joint press release states that the purpose of the Act is to ensure that “philanthropic funds are made available to working charities within a reasonable period of time.”

Generally, the Act would impose: limitations on the deductibility of certain contributions to DAFs; excise taxes on portions of contributions not distributed by certain types of DAFs within a requisite period of time; restrictions on what may be treated as a qualifying distribution for private foundations; and, for purposes of the public support tests for public charities, limitations on when a public charity may treat support from a DAF as so-called “public support.”

Donor Advised Funds

A DAF is a fund or account that is maintained and operated by a section 501(c)(3) organization referred to as a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donation is made, the sponsoring organization has legal control over it, but the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Under current law, there is no time limit on a donor’s advisory privileges and a donor can generally claim a charitable contribution deduction in the tax year in which they make a contribution to a DAF. Unlike private foundations, DAFs are not required to meet annual distribution requirements.

The Act would divide DAFs into three different categories: (1) Qualified DAFs, (2) Qualified Community Foundation DAFs, and (3) Nonqualified DAFs. DAFs would fall under one of these three categories based on factors established in the Act, including the duration of advisory privileges conferred upon donors by the DAF sponsor and whether the sponsoring charity is a geographically limited community foundation or a DAF sponsor with a national issue area focus.

The Act would create varying restrictions on the deductibility of contributions to each of the three types of DAF. For example, contributions to a Qualified DAF would be deductible only if the donor identifies a preferred organization to receive contributions before the donor’s advisory privilege terminates, and a contribution to a Nonqualified DAF would not be deductible as a charitable contribution until the DAF distributes the amount of the contribution and, in the case of a contribution of a noncash asset, until the contributed asset is sold for cash.

In some circumstances, the Act would also create a new excise tax in an amount of 50% of any portion of a contribution not distributed within a requisite period of time.

Private Foundations

Under current law, a private grant-making foundation is required to distribute annually, through grants and grant related expenses, at least 5% of the total fair market value of its noncharitable-use assets from the preceding year in order to avoid excise taxes.

The Act would modify the rules applicable to private foundations, disallowing distributions made to DAFs and administrative expenses that are paid to disqualified persons of the private foundation from being treated as qualifying distributions, with some limited exceptions.

The Act would also exempt from the annual 1.39% excise tax those foundations with a limited duration or which make distributions in excess of 7%.

Public Charities

There are two public support tests for public charities: one for organizations described in sections 509(a)(1) and 170(b)(1)(A)(vi) of the Internal Revenue Code, and one for organizations described in section 509(a)(2). Both tests measure public support over a five-year period.

Generally, the 509(a)(1) test requires that the organization receive at least one-third of its support from contributions from the general public, and the 509(a)(2) test requires that the organization receive more than one-third of its support from contributions from the general public and/or from gross receipts from activities related to its tax-exempt purposes. For purposes of these tests, contributions to a public charity from a DAF constitute support from the general public. Furthermore, under current law, a DAF can be used to facilitate anonymous gifting, as the ultimate distribution comes from the charitable organization sponsoring the DAF, which does not have to disclose the details regarding the source.

Under the Act, for purposes of applying the public support tests of section 509(a)(2) and section 170(b)(1)(A)(vi), when a contribution is made by a DAF sponsoring organization, and the original donor is not identified by the sponsoring organization, the support would not be treated as public support. Instead, the support would be aggregated with all unidentified amounts coming from all DAF sponsoring organizations as if a single person provided such support, lessening the impact of these contributions on the public support test. If the sponsoring organization identifies the original donor, then the support would be treated as provided by such donor.

Effective Date

The proposed rules for restrictions on the deductibility of contributions to DAFs would be effective after the date of enactment of the Act. The effective date for reforms relating to entities, including DAF sponsors, private foundations, and public charities, are with respect to tax years beginning after December 31, 2021.

 

Americans for Prosperity Foundation v. Bonta, No. 19-251, consolidated with Thomas More Law Center v. Bonta, No. 19-255. The Court’s opinion is available here.

On July 1, 2021, the Supreme Court held (6-3) that California’s requirement that charities operating or fundraising in the state file Schedule B to their IRS Form 990, which discloses the names and addresses of their major donors, with the state Attorney General (AG) unconstitutionally infringes on charities’ and donors’ free speech and association rights in violation of the First Amendment.

Background

Currently, charities operating or fundraising in California must register with the California AG and renew their registrations annually by filing with the California AG their IRS Form 990, including Schedule B thereto. Schedule B contains the names and addresses of donors who have contributed more than $5,000 or 2% of an organization’s total contributions in a particular tax year. The State claimed that the disclosure requirement furthers its interest in policing misconduct by charities. It is worth noting that the AG does not publish this information publicly, but, in at least one instance, inadvertently posted this information publicly on a massive scale.

In 2018, Americans for Prosperity Foundation, a public charity, and Thomas More Law Center, a public interest law firm, each challenged the disclosure requirement in federal court in the Central District of California, alleging that the AG had violated their and their donors’ First Amendment rights.

In each case, the District Court granted a preliminary injunction prohibiting the AG from collecting their Schedule B information. The Ninth Circuit reversed, holding that “exacting scrutiny,” and not the more stringent “strict scrutiny” standard applied; and that California’s disclosure requirement satisfied the exacting scrutiny standard because it was sufficiently related to an important government interest in policing charitable fraud, and that it promoted investigative efficiency and effectiveness.

Supreme Court Holding

In an opinion by Chief Justice John Roberts, the Supreme Court reversed the Ninth Circuit, finding California’s disclosure requirement unconstitutional, and effectively prohibiting the AG from collecting Schedule B information.

The Court considered the following two issues: (1) whether the exacting scrutiny or strict scrutiny standard applies to disclosure requirements—such as the one in California—that burden nonelectoral, expression association rights; and (2) whether California’s disclosure requirement is unconstitutional on its face (i.e., it violates all charities’ and their donors’ freedom of association and speech) or solely as applied to the petitioners in this particular case.

Regarding the first issue, in a part of his opinion joined by Justices Kavanaugh and Coney Barrett, Roberts rejected the petitioners’ argument that the most stringent constitutional test, strict scrutiny, should apply. The three-Justice plurality stated that courts should instead use exacting scrutiny, which requires a substantial relation between the disclosure requirement and a sufficiently important government interest. While exacting scrutiny does not require that disclosure regimes be the least restrictive means of achieving their ends, it does require that they be “narrowly tailored to the government’s asserted interest.”

Roberts acknowledged that California has an important interest in preventing wrongdoing by charitable organizations, but noted the dramatic mismatch between the desire to prevent fraud and California’s donor-disclosure requirement: the state requires nearly all 60,000 charities that do business in the state to file their IRS Form 990s, including Schedule B, but that information “will become relevant in only a small number of cases.” Because the state does not rely on those forms to initiate investigations, Roberts concluded, California’s “interest is less in investigating fraud and more in ease of administration.”

 Regarding the second issue, the Chief Justice concluded that the disclosure requirement was invalid in all circumstances, rather than only in the petitioners’ case. In First Amendment cases, he explained, the Court has allowed challengers to seek to invalidate a law in its entirety if a substantial number of its applications are unconstitutional. Roberts concluded that that was the case here as the problems in the State’s disclosure requirement would be present in every scenario. Every demand for information that might “chill association,” Roberts concluded, is therefore unconstitutional.

Implications

  • The Court’s ruling protects sensitive donor information from compelled disclosure. Charities operating or fundraising in California will no longer be required to file an unredacted version of Schedule B to their Form 990s with the AG.
  • Several other states’ AGs collect Schedule B information from charities, and this ruling calls into question the constitutionality of the laws of those states.
  • The decision continues the Court’s trend of affording robust constitutional protection to non-profit organizations, but leaves some uncertainty around the standard of review for compelled disclosure cases.
  • Outside of the context of charities and donor disclosure, the Court’s holding suggests that other compelled disclosure regimes that lack narrow tailoring could be challenged under the First Amendment. In her dissent, Justice Sotomayor asserted that the ruling placed a “bull’s eye” on reporting and disclosure requirements. How the Court will apply this decision to other compelled disclosure contexts remains unclear.

All quotations are from Americans for Prosperity Foundation v. Bonta, No. 19-251, consolidated with Thomas More Law Center v. Bonta, No. 19-255. 

 

 

The New York State Assembly and Senate have passed A1141A/S4817A, a bill to repeal certain recently enacted amendments to N.Y. Exec. Law § 172-b, which, effective January 1, 2021, (a) imposed duplicative and burdensome filing requirements on 501(c)(3) nonprofits and (b) required public disclosure of previously confidential information about their donors.  The bill now goes to Governor Cuomo for signature or veto.

Charitable organizations that are organized, operating or fundraising in New York State must register with the Charities Bureau of the New York State Attorney General’s office and file an annual financial report. This obligation is satisfied by filing the NYS CHAR 500 Form along with the organization’s IRS Form 990 and applicable schedules. Under recent amendments to N.Y. Exec. Law § 172-b, effective January 1, 2021, any organization that is required to file such an annual financial report is also required to make the same tax filing, again, with the New York Department of State. Nonprofit organizations, advocacy organizations and the City Bar Association expressed concerns regarding this redundant filing obligation, as it is a burdensome requirement that serves no useful purpose. A1141A/S4817A would eliminate this redundant requirement for most nonprofit organizations by repealing the requirement to file with the New York Department of State.

This bill would also repeal a recently enacted requirement that the New York Department of State publish on its website donor information contained on Schedule B of the IRS Form 990, which was an alarming change. Although the balance of a 501(c)(3) organization’s Form 990 is publicly available on the IRS and Charities Bureau websites and from other public sources, donor information contained on Schedule B has long been protected as confidential and not made public. Charities had expressed concern that publicly disclosing donors’ identities would discourage donations to 501(c)(3) organizations by potential donors who prefer to remain anonymous. A1141A/S4817A would require the New York Department of State to keep this information confidential and would further clarify that donors’ identities should not be disclosed under the Freedom of Information Law.

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As described in our previous blog post, Code § 512(a)(6), which was enacted in 2017 as part of the Tax Cuts and Jobs Act (the “Act”), provides that, in the case of an organization with more than one unrelated trade or business, unrelated business taxable income (“UBTI”) shall be computed separately with respect to each such trade or business. Internal Revenue Code (“Code”) § 513(a) defines “unrelated trade or business” to mean any trade or business the conduct of which is not substantially related (aside from the need for income) to the exercise or performance by an exempt organization of its charitable, educational, or other purpose constituting the basis for its exemption. Unless a specific exception applies, gross income of an exempt organization derived from an unrelated trade or business that is regularly carried on by the organization (minus certain deductions that are directly connected with the carrying on of such trade or business) is taxable as UBTI.

Prior to the Act, an exempt organization’s income from unrelated businesses was calculated in the aggregate, enabling an organization to offset gains from one unrelated trade or business with losses from another. The Act eliminated this means for reducing the net taxable income from unrelated business ventures, but it did not provide guidance as to what constitutes a “separate” business for purposes of new  § 512(a)6. In August 2018, the Internal Revenue Service (“IRS”) issued Notice 2018-67 (the “Notice”) setting forth interim guidance for determining what constitutes a separate unrelated trade or business for purposes of calculating UBTI. Proposed regulations were issued on April 24, 2020 (the “Proposed Regulations”) and, on December 2, 2020, the U.S. Treasury Regulations were amended to add final regulations under Code § 512(a)(6) (the “Final Regulations”).

The Final Regulations provide guidance regarding how an exempt organization determines if it has more than one unrelated trade or business and, if so, how the organization calculates UBTI under § 512(a)(6). According to the Final Regulations, an exempt organization must first determine whether it carries on unrelated trade or business activity that generates UBTI. If it so determines, the organization must then identify each of its separate unrelated trades or businesses using the first two digits of the North American Industry Classification System Code (“NAICS 2-digit Code”) that most accurately describes the unrelated trade or business. This identification is based on more specific NAICS codes such as the NAICS 6-digit code level (which identifies more than 1000 trades or businesses) and the descriptions in the current NAICS manual, which describe trades or businesses using more than 2 digits. The businesses described in the more specific code levels are consolidated under twenty broad categories identified by the NAICS 2-digit Codes. Many trades or businesses that might otherwise be considered separate trades or businesses are aggregated under an NAICS 2-digit Code and may therefore be treated as one trade or business for purposes of  § 512(a)6.

The Final Regulations provide additional, detailed guidance regarding the computation of UBTI, including the following:

  • Aggregation under a single NAICS 2-digit Code: An exempt organization may report each NAICS 2-digit Code only once, meaning an organization may aggregate trade or business activities that may occur in different geographic locations. However, if trade or business activities would be best described by two different NAICS 2-digit Codes, the activities must be treated as separate unrelated trades or businesses.
  • Deductions: Code § 512(a)(1) provides that UBTI is the equal to gross unrelated business income minus certain deductions that are directly connected with the carrying on of such trade or business. The Final Regulations provide that an exempt organization with more than one trade or business must allocate such deductions between the separate unrelated trades or businesses using the “reasonable basis” standard. Under this standard, the portion of any item allocated to an unrelated trade or business activity must be proximately and primarily related to that business activity. Expenses, depreciation and similar item attributable solely to the conduct of an unrelated trade or business are proximately and primarily related to that trade or business and qualify to reduce income from such trade or business to the extent such items meet certain requirements under the Code.
  • Net Operating Losses. Code §§ 172(a) and 512(b)(6) allow a deduction for net operating losses (“NOLs”), defined as the excess of allowable deductions over gross income. For tax years beginning after December 31, 2017, UBTI must be computed separately with respect to each trade or business for purposes of determining any NOL deduction. Losses incurred from an unrelated business activity may be carried over to future taxable years without limitation, but carryovers may be used to offset income only with respect to the trade or business from which the loss arose. Under the Final Regulations, NOLs for taxable years beginning on or before December 31, 2017 may be used to offset an organization’s total UBTI, but only in a manner that allows for maximum utilization of NOLs for taxable years beginning on or after January 1, 2018.
  • Change of NAICS Classification: An exempt organization that wishes to change the NAICS 2-digit identification of a separate unrelated trade or business must report the change in the taxable year of the change and provide (a) the NAICS 2-digit Code identification of the unrelated trade or business in the previous taxable year, (b) the NAICS 2-digit Code identification of the unrelated trade or business in the current taxable year, and (c) the reason for the change. Notably, the Notice provided that, for tax years preceding publication of the Final Regulations, an organization could rely on a reasonable, good-faith interpretation using the NAICS 6-digit codes to identify separate trades or businesses. The transition from NAICS 6-digit codes to NAICS 2-digit Codes could result in the combination of NOLs if an exempt organization has trade or business activities that would be separate unrelated trades or businesses if identified using NAICS 6-digit codes but would be one unrelated trade or business if identified using NAICS 2-digit Codes. To address this issue, the Final Regulations permit an exempt organization to amend a Form 990-T Exempt Organization Business Income Tax Return filed prior December 2, 2020 to report separate unrelated trades or businesses using NAICS 2-digit Codes.
  • Investment Activities “Silo.” The Final Regulations continue to treat an exempt organization’s investment activities that are subject to unrelated business income tax as a separate unrelated trade or business for purposes of § 512(a)(6). For most exempt organizations, the exclusive list of investment activities that may be treated as a single, separate unrelated trade or business for purposes of § 512(a)(6) is as follows: (a) qualifying partnership interests (“QPI”); (b) qualifying S corporation interests; and (c) debt-financed properties. Note that an interest in a partnership is a QPI only if it meets the requirements of both (i) the de minimis test (i.e., the exempt organization holds, directly or indirectly, no more than 2 percent of the profits interest and no more than 2 percent of the capital interest in the partnership during the exempt organization’s taxable year with which or in which the partnership’s taxable year ends), and (ii) the participation test (i.e., the exempt organization directly holds no more than 20 percent of the capital interest, and does not “significantly participate” in the partnership).
  • Specified Payments from a Controlled Entity. The Final Regulations provide that “specified payments” (defined as any interest, annuity, royalty, or rent) made to an exempt organization from an entity controlled by such exempt organization will be treated as gross income from a separate unrelated trade or business for purposes of § 512(a)(6). If a controlling organization receives specified payments from two different controlled entities, the regulations treat the payments from each controlled entity as income from separate unrelated trades or businesses.
  • Charitable Contribution Deduction. Code § 512(b)(10) permits an exempt organization to take a charitable contribution deduction (limited to 10 percent of UBTI). The Final Regulations clarify that the charitable contribution deduction of an exempt organization with more than one unrelated trade or business is taken against the organization’s total UBTI.
  • Public Support Test: There are generally two public support tests for public charities: (a) the Code § 509(a)(1) test, which requires that an organization receive at least one-third of its support from contributions from the general public (or meet the 10 percent facts and circumstances test), and (b) the 509(a)(2) test, which requires that an organization receive more than one-third of its support from contributions from the general public and/or from gross receipts from activities related to its tax-exempt purposes, and no more than one-third of its support from gross investment income and UBTI. The Proposed Regulations noted that § 512(a)(6) could inadvertently impact calculation of public support because of the inability of an exempt organization with more than one unrelated trade or business to use losses from one unrelated trade or business to offset gains from another unrelated trade or business. The Final Regulations address this issue by permitting an exempt organization with more than one unrelated trade or business to determine public support using either its UBTI calculated under § 512(a)(6) or using its total, aggregate UBTI.

Additional guidance under the Final Regulations includes special rules regarding calculation of UBTI as related to controlled foreign corporations, social clubs, Voluntary Employees Beneficiary Associations, Supplemental Unemployment Benefits Trusts, individual retirement accounts, subpart F income and global intangible low-taxed income. The Final Regulations are applicable to taxable years beginning on or after December 2, 2020. For taxable years beginning on or after January 1, 2018 and before December 2, 2020, an exempt organization may choose to apply the Final Regulations or to rely on a reasonable, good-faith interpretation of § 512(a)(6), which includes the methods of aggregating or identifying separate trades or businesses provided in the Notice or the Proposed Regulations.

– -A. Benion

On March 13, 2020, an emergency declaration was issued authorizing the Secretary of the Treasury to provide relief from certain tax deadlines for taxpayers impacted by the ongoing COVID-19 epidemic. In response, the Internal Revenue Service (IRS) postponed the deadlines for certain time-sensitive actions, including the deadline for exempt organizations to file an annual information return or electronic notice on Form 990, 990-EZ, 990-PF or 990-N. Typically, a Form 990, 990-EZ, 990-PF, or 990-N must be filed by the 15th day of the 5th month after the end of an organization’s accounting period (e.g., for an organization with a fiscal year end of December 31, the filing is due on May 15 of the following year). In Notices 2020-23 and 2020-35, on account of COVID-19, the IRS postponed the due date for filings originally due to be submitted between April 1, 2020 and July 14, 2020 until July 15, 2020.

If a tax-exempt organization fails to file a required Form 990-series annual return or notice for three consecutive years, such organization’s tax exemption is considered revoked as of the due date of the third annual return or notice. The IRS issues notice of such revocation to each affected organization, and maintains a public list of organizations whose exempt status has been so revoked on IRS.gov. On October 26, 2020, the IRS issued a statement that “due to systemic limitations” it was unable to update the computer program that automatically issues notices of revocation to recognize the extended July 15, 2020 deadline. As a result, some revocation notices were issued prematurely to organizations that did not meet their original filing deadlines. The IRS was, however, able to prevent eligible organizations that attempted to file electronically by July 15 from being publicly listed as automatically revoked, so such organizations are still shown as tax-exempt on the IRS website.

According to its statement, the IRS is currently processing paper filings that allow the reversal of auto-revocation, and reviewing cases and corresponding with organizations that received a premature notice. Affected organizations can use the dedicated fax number (855) 247-6123 to correspond with the IRS and present documentation of applicable filings.

A. Benion

The Small Business Administration (“SBA”) has recently issued guidance regarding forgiveness of Paycheck Protection Program (“PPP”) loans authorized under the March 27, 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act (“PPPFA”).

Enacted on June 5, 2020, the PPPFA makes significant changes to the CARES Act provisions governing loan forgiveness, as follows:

  • Under the CARES Act, a PPP loan recipient was eligible for forgiveness of the portion of the loan used to cover payroll and certain other eligible costs during the 8-week “covered period” beginning on the date of the origination of the loan. The PPPFA extends the covered period for all PPP loans to December 31, 2020 (although an eligible loan recipient that received a covered loan before June 5, 2020 could elect to apply the 8-week covered period and begin repayment thereafter).
  • The CARES Act provided that any balance remaining on a PPP loan after application of forgiveness had a maximum maturity of 2 years, and lenders were required to provide complete payment deferment for at least 6 months. The PPPFA extends the minimum maturity for a loan issued after June 5, 2020 to five years, and it provides that all loan recipients who seek forgiveness may defer any payments due until the forgiveness amount is received by the lender. Loan recipients who do not apply for forgiveness have 10 months from the end of the covered period to begin making payments.
  • The CARES Act required that 75% of the forgiven loan amount be used for payroll costs. The PPPFA amends that requirement to provide that only 60% of a forgivable covered loan must be spent on payroll, meaning up to 40% could be used to cover approved non-payroll expenses (e.g., rent and utilities).
  • The CARES Act stated that the amount of loan forgiveness would be reduced if the number of full-time equivalent employees employed by the loan recipient during the covered period was reduced as compared to the number of employees employed during a designated period before the onset coronavirus pandemic. The PPPFA amends this provision to state that loan forgiveness is determined without regard to a proportional reduction in a loan recipient’s number of full-time equivalent employees if, due to compliance with COVID-19 safety guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 1, 2020 and December 31, 2020, the recipient was (a) unable to rehire individuals who were employees on February 15, 2020 and unable to hire similarly qualified employees for unfilled positions by December 31, 2020; or (b) unable to return to the same level of business activity as the recipient was operating at before February 15, 2020.

On October 13, 2020, the SBA released its Frequently Asked Questions (FAQs) on PPP Loan Forgiveness (the “FAQs”) which provides additional guidance regarding PPP loan forgiveness. Importantly, the FAQs:

  • confirm that, as long as a borrower submits its loan forgiveness application within 10 months of the expiration of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments.
  • confirm that a borrower may submit a loan forgiveness application any time before the maturity date of the loan; if a borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, loan payments are no longer deferred and the borrower must begin making payments.
  • clarify that, in addition to salaries or wages, payroll costs that qualify for loan forgiveness include all forms of cash compensation paid to an employee (including tips, commissions, bonuses, and hazard pay) up to a maximum of $100,000 on an annualized basis.
  • state that payroll and eligible non-payroll costs that are (a) incurred during the covered period and paid after the covered period, or (b) incurred before the covered period but paid during the covered period, are all eligible for loan forgiveness.
  • confirm that employer expenses for employee group health care benefits and employer contributions for employee retirement benefits that are paid or incurred by the borrower during the covered period are eligible for loan forgiveness.

You can read the full FAQs here. We expect the SBA to issue additional guidance as the December 31, 2020 end date for the covered period approaches.

– A. Benion

As discussed in our previous blog post, on April 16, 2020 New York’s Governor Cuomo issued Executive Order No. 202.18 which, among other things, modified Not-for-Profit Corporation Law (“N-PCL”) § 603 to permit annual meetings of members to be held remotely or by electronic means, effective through May 16, 2020. Absent such modification, the N-PCL explicitly permits directors to attend Board meetings by conference telephone or other electronic means (unless otherwise restricted by the organization’s certificate of incorporation or bylaws) but it does not expressly provide for such remote participation at member meetings.

The modification addressed a serious challenge faced by New York nonprofit membership organizations unable to meet in person due to coronavirus social distancing restrictions. Recognizing the need for further guidance regarding how to conduct annual and special membership meetings remotely, the New York Attorney General’s Charities Bureau has now issued Guidance for Conducting Virtual Meetings of Members of New York Not-for-Profit Corporations (the “Guidance”).

As summarized below, the Guidance describes best practices that should be considered by nonprofits when planning and conducting virtual membership meetings.  The specific procedures that should be followed will vary depending upon numerous factors (e.g., requirements in the organization’s bylaws or certificate of incorporation, the number of voting members, the matters to be voted on, etc.), but the key is to ensure that all members attending the meeting can “hear and be heard” and have the ability and information necessary to participate and to vote.

In addition to complying with general requirements for membership meetings as specified in the organization’s governance documents and/or the N-PCL (e.g., requirements regarding meeting notice, determination of members entitled to vote, achieving a quorum, recording minutes, counting and recording votes, etc.), the Guidance advises nonprofits conducting membership meeting by virtual means to, among other things,:

Planning the Meeting:

  • Identify an accessible platform (i.e., a video or phone conference platform) for the meeting and provide information about it to all members in advance of the meeting. Members should have the option to dial-in if they are unable to access to a video conference.
  • Prepare and disseminate, before the meeting, notice of the date and time of the meeting, the platform on which the meeting will be conducted, and instructions on how to access the platform.
  • Test the system being used for the virtual meeting, and determine the methods for taking attendance and counting votes.
  • Appoint someone to manage the meeting to make sure that the meeting adheres to the agenda and allows an opportunity for attendees to participate.
  • Appoint someone to help members who are having trouble joining the meeting (a separate phone number should be disseminated to allow reporting and resolving problems in real-time).
  • Maintain a record of calls or complaints about dialing or logging-in.

Conducting the Meeting:

  • Ensure that participants can hear (and, if applicable, see) the proceedings and communicate to the full group in real-time (e.g., via a text-based “comment” function or otherwise).
  • Give members the opportunity to communicate, bring motions or nominations from the floor, consistent with the organization’s by-laws, and consider challenges to nominations, voting eligibility and requirements, consistent with the organization’s by-laws.

According to the Guidance, if the validity of a virtual meeting or participation by members via virtual means is ever challenged, the Charities Bureau will take the position that meetings conducted in accordance with the Guidance should be deemed in substantial compliance with the requirements of the N-PCL. You can read the full text of the Guidance here.