This is a part of a series of information articles in response to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was enacted as an economic stimulus package on March 27, 2020.
While the majority of the Act's provisions focus on private sector industries, several provisions do apply to faith-based organizations, including the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDLs), employee retention credit, and deferred payment of payroll taxes. The Small Business Administration (SBA) has issued guidance that any faith-based organization is eligible to receive the PPP and EIDL loans under CARES.
The SBA guidance clarifies that faith-based organizations are subject to the same rules regarding the use of funds as other potential borrowers. In particular, the SBA has clarified that funds do not need to be limited to expenditures for secular purposes and that PPP funds may be used to compensate members of the clergy and other staff engaged in the religious mission of these institutions.
If a faith-based entity avails themselves to these programs then they will not limit the authority of a faith-based entity to define the standards, responsibilities, or duties of its membership, or limit the freedom of the organization to select and hire individuals to perform work connected to that organization's religious exercise, however, the loan recipient may not discriminate on the basis of race, color, religion, sex, handicap, age or national origin with regard to goods, services, or accommodations offered. These issues should be discussed with legal counsel before applying to these programs.
Paycheck Protection Program & Disaster Assistance Loans
The SBA has clarified that faith-based entities and other nonprofits are eligible to receive SBA loans regardless of whether they provide secular social services. That is, "no otherwise eligible organization will be disqualified from receiving a loan because of the religious nature, religious identity, or religious speech of the organization."
Religious institutions can use the loan proceeds for certain payroll costs, rent, utilities, mortgage interest, and interest on other debt obligations incurred before Feb. 15, 2020. In addition, these organizations are eligible to have such loans forgiven, effectively turning the loans into grants if additional requirements are met. For-profit businesses owned by any religious institution are also eligible for loans under the new Paycheck Protection Program, as long as they meet the other SBA eligibility requirements.
Access to the loan program is limited to entities with 500 or fewer employees. For the purposes of this calculation, the employees of all an entity’s affiliates are included. This sort of affiliation can arise, for instance, if a local church is connected to a larger organization. However, the SBA has stated that if the connection is based on religious teaching or belief, or is otherwise centered around religious exercise, the affiliation rules do not apply. If a faith-based organization is partnered or connected with another purely for administrative convenience or other secular reasons, the affiliation rules may be applicable. Currently, faith-based organizations are permitted to make their own good-faith determination that this exception applies.
To be eligible for EIDL assistance, the religious institution had to be located in an area affected by a disaster or emergency, and it had to suffer a substantial economic injury as the result of such disaster. The CARES Act expressly includes the COVID-19 pandemic as an applicable disaster. A substantial economic injury is an injury that results in the inability of the religious institution to meet its obligations as they mature; to pay its ordinary and necessary operating expenses; or to market, produce, or provide a product or service ordinarily marketed, produced or provided by the religious institution.
Employee Retention Credit
The CARES Act allows employers to claim a new credit against applicable employment taxes equal to 50% of qualified wages paid between March 12, 2020, and Dec. 31, 2020, with respect to certain employees, up to a maximum of $10,000 of wages per employee. The credit is available for any calendar quarter during which the employer’s operation was suspended due to governmental restrictions relating to COVID-19. For this credit, any employer that is a tax-exempt organization under IRC 501(c), which includes charities, business leagues, and credit unions, to name a few, is considered to be an eligible employer with respect to all of its operations.
Religious institutions that are subject to closure due to COVID-19 are allowed a credit against employment taxes (OASDI) equal to 50% of qualified wages paid to each employee (up to $10,000 for all quarters) between March 13, 2020 and Dec. 31, 2020. The maximum credit per employee is $5,000. The tax credit does not apply to employee income tax withholding, the employee or employer portion of Medicare tax, or the employee portion of the Social Security Tax. Employers may opt-out of the credit for any calendar quarter.
Religious institutions will be eligible for the employee retention credit if they would have been carrying on a trade or business during 2020 where their operation is fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to the COVID-19 health emergency or sees a significant reduction (50%) in receipts based on the same quarter in the previous calendar year.
The calculation of ‘qualified wages’ depends on the average number of full-time (FT) employees of the religious institution.
- If the average number of FT employees during 2019 was greater than 100, then wages are counted only to the extent that they are paid to an employee who is not providing services due to a COVID-19 order or due to a significant decline in gross receipts. Wages for those employees cannot exceed the amount those employees would have been paid for working an equivalent duration the 30 days immediately preceding the period.
- If the average number of FT employees during 2019 was 100 or less, then wages are counted to the extent that they are paid to all employees due to a COVID-19 order or due to a significant decline in gross income.
The credit is used to reduce the required deposits of payroll taxes for each quarter that have been withheld from an employee’s wages. So, the religious institution may keep the withheld payroll taxes (instead of having them impounded or deposited with the IRS) in an amount up to the value of the credit. Credits in excess of the required employment tax deposit requirement can get refunded (including receiving an advance credit) by filing Form 7200.
PLEASE NOTE: If a religious institution receives a tax credit for paid sick and family leave wages under the Families First Coronavirus Response Act (FFRCA) or a Paycheck Protection Program (PPP) loan under the CARES Act, they are not eligible to receive employee retention credits.
Deferment of Payroll Tax Payments
The CARES Act permits religious institutions to delay payment of their share of payroll taxes from March 27, 2020, through the end of 2020.
Any deferral of payments will be treated as timely so long as payments are made by the following payment schedule:
- Half of such amount is due by Dec. 31, 2021; and
- Remaining amount due by Dec. 31, 2022.
PLEASE NOTE: This ability to delay payment does not apply if an organization obtains a loan and has such a loan forgiven under the Paycheck Protection Program.
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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues covered. It is not intended to be a comprehensive summary of all laws which may apply to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your legal advisor regarding the specific application of the information to your plan.