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Follow Up to the April 1, 2020 CapinCrouse Webcast

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Below, we address some common questions that arose during our April 1, 2020 nonprofit tax webcast on COVID-19 legislation.

Can independent contractors (i.e., persons who receive a Form 1099-MISC) be included in the payroll costs for determining the maximum amount of a Paycheck Protection Program loan?

On our April 1, 2020 webcast, we were asked whether amounts paid to independent contractors could be included along with employee payroll costs in arriving at total payroll costs that are multiplied by 2.5 to arrive at the maximum loan amount. Our response during the webinar was “No.” However, a further reading of new section 15 U.S.C. 636(a)(36)(A)(viii), the section that defines the term “payroll costs,” leads us to conclude that there is some ambiguity in the language of the statute.

The statute defining payroll costs reads as follows:

(viii) the term ‘payroll costs’—

     (I) means—

(aa) the sum of payments of any compensation with respect to employees that is a—

(AA) salary, wage, commission, or similar compensation;

(BB) payment of cash tip or equivalent;

(CC) payment for vacation, parental, family, medical, or sick leave;

(DD) allowance for dismissal or separation;

(EE) payment required for the provisions of group health care benefits, including insurance premiums;

(FF) payment of any retirement benefit; or

(GG) payment of State or local tax assessed on the compensation of employees; and

(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period;

The italicized portion of subsection (bb) can be read to mean that, in addition to employee payroll costs described in subsection (a), payroll costs include “payments of any compensation to… a sole proprietor or independent contractor.” This reading would permit the inclusion of amounts paid to a 1099 recipient.

However, this reading can lead to a perverse result. We say this because independent contractors and sole proprietors are separately authorized to seek a Paycheck Protection Program loan under 15 U.S.C. 636(a)(36)(D)(ii). If both the nonprofit and the independent contractor or sole proprietor apply for a Paycheck Protection Program loan for the same compensation, then there has been a “double-dip,” which has routinely been disallowed elsewhere in the statute.

Because of this issue, we believe you should consult with your Small Business Administration (SBA) lender and disclose any independent contractor amounts you choose to include in the payroll costs disclosed on your loan application.

A further word of caution: It is possible that combining employees and independent contractors under a heading of “payroll costs” could create an issue later in a payroll audit where the IRS considers whether workers classified as independent contractors have been appropriately classified as such. Accordingly, carefully consider whether you want to include independent contractors in your payroll cost numbers.

Should our church or ministry be concerned that receiving a Paycheck Protection Program loan or Economic Injury Disaster Loan will infringe on our right to choose who we employ or otherwise subject us to unintended consequences?

We’ve been asked whether applying for a Paycheck Protection Program (PPP) loan or an Economic Injury Disaster Loan (EIDL) will somehow require a religious employer to hire employees who are unwilling to subscribe to the organization’s statement of faith or comply with the organization’s code of conduct. We strongly encourage you to consult with your legal counsel on this point. However, you can draw your legal counsel’s attention to the following.

  1. The SBA regulations do contain a general rule prohibiting borrowers from discriminating in hiring on the basis of “race, color, religion, sex or national origin.” (13 C.F.R. 113.3(b))
  2. However, the SBA regulations also include the following regarding religious employers:
    (h) Nothing in this part shall apply to a religious corporation, association, educational institution or society with respect to the membership or the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution or society of its religious activities. (13 C.F.R. 113.3-1(h); emphasis added)We believe this regulation provision can be fairly read to state that the current employment-related protections that religious employers enjoy under Title VII of the Civil Rights Act remain in effect and the CARES Act has neither explicitly nor implicitly undermined those protections in any meaningful sense.
  3. Some commentators have raised a question as to whether receiving funds under a PPP loan or EIDL constitutes a receipt of federal funds that will in turn subject the recipient to various regulations imposed on recipients. The concern is that there is nothing in the CARES Act that precludes the application of such regulations. In addition, for many borrowers this will be the first time they will potentially have received federal funds and therefore they are unlikely to be familiar with or have an understanding of the potential for regulation.

It is difficult to assess the validity of this concern. It would seem the emergency/disaster context in which these loans are being made would mitigate against this, but legal counsel should advise on this risk.

What constitutes a quarantine or isolation order to qualify for the Emergency Paid Sick Leave provided by the Families First Coronavirus Response Act?

A number of people have asked about the nature of a quarantine or isolation order required to receive preferred category benefits under the Emergency Paid Sick Leave benefit provided by the Families First Coronavirus Response Act (FFCRA).  The relevant section of the FFCRA states:

… an employer shall provide to each employee employed by the employer paid sick time to the extent that the employee is unable to work (or telework) due to a need for leave because:

(1) The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19.

It has been an open question whether a “shelter-in-place” or “stay-at-home” order, or some derivation thereof, would qualify as a quarantine or isolation order under the terms of the FFCRA. In the absence of guidance from the Department of Labor and for a variety of reasons, we had taken the position that a quarantine or isolation order had to be directed at a specific individual.

Late yesterday (April 1, 2020), the Department of Labor released guidance on this issue in the form of temporary regulations. “Subject to a quarantine or isolation order” is now defined to include “quarantine, isolation, containment, shelter-in-place, or stay-at-home orders issued by any Federal, State, or local government authority that cause the employee to be unable to work even though his or her Employer has work that the Employee could perform but for the order.” Prop. Rul. 29 C.F.R. § 826.10.

Therefore, many workers will now meet the threshold test for eligibility for the Emergency Paid Sick Leave. However, it is important to note that merely being subject to a shelter-in-place or stay-at-home order does not automatically qualify an employee for leave. Rather, the existence of the order and compliance with the order must be the reason that the employee is unable to work and the employee must be unable to telework. Further, the employer must have work for the employee to do. If the employer is also “shut down” without work for the employee to do, then the employee would not fit into this category.

Please contact us at info@capincrouse.com with any questions.

Ted Batson

Ted serves as partner, tax counsel, and Professional Practice Leader – Tax. As a certified public accountant and tax counsel, Ted advises exempt organizations of all sizes on a wide range of issues. This includes consulting on tax and employee benefit related matters, representation before state and federal tax authorities, and assistance with firm audit or advisory engagements to formulate advice and counsel on important operating and tax issues. Ted also leads the firm’s tax preparation practice, including IRS Forms 990 and 990-T and related state forms.

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