Photo of Pooja Shah Kothari

Pooja Shah Kothari

Pooja Shah Kothari is a member of the Tax Practice and Election and Political Law Groups. She has experience counseling clients on tax controversy matters at the Federal and state level. In addition, Pooja advises various tax-exempt and nonprofit organizations on a wide range of issues, such as federal tax exemption, unrelated business income tax, private benefit, inurement, and other tax rules, as well as entity formation and other corporate governance matters.

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November 1, 2024, Covington Alert

In a unanimous decision, the U.S. Court of Appeals for the Fifth Circuit affirmed the Tax Court’s denial of tax-exempt status for Memorial Hermann Accountable Care Organization (MHACO) as an organization described in section 501(c)(4) of the Internal Revenue Code. The decision could have implications for lobbying, political, and member-related activities of social welfare organizations.

Background

As a Texas nonprofit corporation, MHACO provides healthcare to patients under either its “Medicare Shared Savings Program” (MSSP), which specifically benefits Medicare patients, or under employer-sponsored commercial insurance plans.

MHACO applied to the IRS for recognition as a 501(c)(4) organization. The IRS issued a final adverse determination letter, stating that MHACO did not meet the requirements for tax-exempt status of operating exclusively for social welfare purposes because its activities primarily benefitted commercial payors rather than the public.

Legal Issue

The crux of the issue is the permissible threshold of so-called “nonexempt” activity that an organization may engage in and still qualify for exemption. Under one, narrower, legal standard—referred to as a “substantial nonexempt purpose” test and based on the Internal Revenue Code and a 1945 Supreme Court case—the presence of a single substantial nonexempt activity disqualifies an organization from exemption. Under a second legal standard—referred to as the “primary purpose” test and based on the Treasury Regulations—as long as an organization is primarily engaged in exempt activity, it will qualify for exemption. Stated another way, the primary purpose test permits a higher level of nonexempt activity: To the extent the nonexempt activity is not the organization’s primary activity, the organization will qualify for exemption under this second test.Continue Reading 501(c)(4) Organizations Could Face Additional Scrutiny Following Court Decision

On Friday, January 1, 2021, the Senate voted to override President Trump’s veto of the 2021 National Defense Authorization Act (“2021 NDAA”) by a vote of 81 -13.  The Senate’s override follows the House of Representatives’ override on December 28, 2020, and the 2021 NDAA is now law.

Included in…
Continue Reading New Information Reporting on Beneficial Owners Included in 2021 NDAA

Certain tax-exempt organizations are no longer required to report to the IRS the names and addresses of donors on IRS Form 990, Schedule B, according to final regulations published on May 28, 2020.  Noncharitable organizations, such as 501(c)(4) social welfare organizations and 501(c)(6) trade associations, may report only the amounts

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Continue Reading Reporting Donors’ Names to IRS No Longer Required for Certain Nonprofits Per Final Treasury Regulations

In a wave of legislation designed to combat the global economic impacts of COVID-19, Congress has enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act (FFCRA).

At a high level and among many other things, the Acts provide:

  • $349 billion in loan funds for small businesses and nonprofit employers, with a loan forgiveness opportunity;
  • Loan funds for larger businesses and nonprofits;
  • Increased amounts for income tax charitable deductions;
  • Employment tax and benefits relief; and
  • Expanded paid sick leave and family and medical leave.

This alert provides a brief summary of some of the key provisions of both Acts that apply to nonprofit organizations. We have also included information for organizations that are unable to pay rent and are considering whether to seek a rent abatement or deferral.

Small Business Loans

Paycheck Protection Program (PPP)

One of the core pieces of the CARES Act is the Paycheck Protection Program (“PPP”) that will generally provide loans for up to $10 million. The CARES Act explains that 75 percent of the loan proceeds must be used for payroll costs. The PPP is administered by the Small Business Administration (“SBA”) as a temporary addition to its 7(a) loan program. The CARES Act dictates that entities are eligible if they have (1) 500 or fewer employees with a principal place of residence in the United States (including full-time, part-time, or other status) or (2) fit within the SBA size standards, which could exceed 500 employees in certain industries. On April 4th, SBA clarified that because it may not have established size standards for all the industries in which nonprofits work, applicants are eligible for the PPP if they “employ not more than 500 employees or, if applicable, the SBA employee-based size standard for the industry in which the organization or business operates.”

Eligible entities could include nonprofit organizations that are organized under sections 501(c)(3) and 501(c)(19) of the Internal Revenue Code and were in operation on February 15, 2020. Faith-based organizations, such as churches, that meet the requirements of section 501(c)(3) of the Internal Revenue Code are eligible for loans under the PPP program. Other types of nonprofit organizations, such as 501(c)(6) trade associations, would not be eligible under the program.

Nonprofits will be subject to the SBA’s affiliation rules. The SBA will consider the number of employees of both an applicant and an applicant’s “affiliates” when determining loan eligibility. In general, an affiliate is another company or other legal entity that has an ownership interest in a business and the ability to control that business but the rules on affiliation are detailed and fact specific.

In addition to payroll costs, which include salaries, wages, tips, paid sick or medical leave, dismissal and separation allowances, health benefits and insurance premiums, retirement benefits, and limited state and local payroll taxes, 25 percent of the loans may be used for mortgage interest, rent, utility payments, costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; interest payments on other debt obligations incurred before February 15, 2020; and refinancing an EIDL made between January 31, 2020 and April 3, 2020. However, as explained below, only a subset of these costs are eligible for forgiveness.

The loan amount is the lesser of $10 million or 2.5 times the average total monthly payroll costs with special rules for seasonal employers and recently formed companies. The maximum interest rate is 1 percent.

Loan proceeds can be forgiven for loans made from February 15, 2020 through June 30, 2020, to the extent that at least 75 percent of the proceeds are used in the eight weeks following the origination of the loan to fund payroll costs (including certain benefits), with the remainder used to pay mortgage interest, rent, and utilities. Payroll costs are limited to a $100,000 cap per employee. There is ambiguity as to whether the interest owed on the loan will be forgiven.Continue Reading COVID-19 Relief and Nonprofits: What You Need to Know