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New Tax Relief Provided for Nonprofits, State and Local Government, and Native American Tribes

07/13/2020 Bryan Pautsch

Last Wednesday, July 8, the Senate unanimously passed bipartisan legislation to help nonprofits, state and local governments, and federally recognized Native American Tribes remain financially viable during the COVID-19 pandemic. The legislation  ensures these entities receive federal help for unemployment payments upfront, instead of being reimbursed at a later time. The bill was passed by the House on Thursday and currently awaits President Trump’s signature.

Upon House passage, Rep. Kevin Brady (R-TX), the top Republican on the House Ways and Means Committee, released the following statement: 

“I am glad to see the House pass this fix to help our churches and nonprofit organizations. Congress acted with unprecedented speed to help our workers weather the storm that the COVID-19 pandemic presented, and today’s vote ensures that our nonprofit organizations can continue to focus on serving our communities while paying their workers. I am eager to continue working on a bipartisan basis to ensure our workers can get back to their jobs.”

Nonprofit organizations, state and local governments, and federally recognized Native American Tribes generally have the option of operating as reimbursing employers or self-insuring their own state unemployment obligations, meaning they make payments in lieu of contributions to finance benefits attributable to them. Most states periodically bill reimbursing employers for benefits paid out to their former employees. In turn, employers who opt for this payment method are not obligated to pay the regular unemployment insurance payroll taxes.

The CARES Act provided relief to these organizations who elected to self-insure their state unemployment responsibilities by federally reimbursing 50% of the state UI obligations for these employers for the period beginning March 13 and ending December 31. 

The Labor Department issued guidance in April of 2020 requiring states to collect 100 percent of the unemployment costs from nonprofits upfront, with the federal government reimbursing the nonprofit organization at a later date. This guidance put a tremendous cash flow strain on the affected nonprofits.

This Bill passed by the House/Senate would clarify that nonprofits are only required to provide 50 percent in payments upfront. The net cost to the employer and the federal government would remain the same, but would free up invaluable cash flow for the nonprofit.

For any questions related to this recent legislation, or nonprofit/governmental tax guidance in general, contact Bryan Pautsch at bpautsch@vlcpa.com or 800.887.0437.

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