The CARES Act and its Impact on Nonprofit Organizations
Updated: Apr 16, 2020
Written by attorney Richard C. Baker
On March 27, 2020, the monumental Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. Of its many provisions designed to help stabilize the economy and to keep individuals and businesses afloat during this time of crisis, several of the provisions are particularly helpful to nonprofit organizations. One important provision is the Payment Protection Program (“PPP”) which allocates $350 billion for loans to employers with the aim of avoiding massive layoffs. A second important set of provisions are the payroll tax credits granted to employers in the Emergency Family and Medical Leave Expansion Act (FMLA+) and the Emergency Paid Sick Leave Act (EPSLA). Both the PPP loans and the payroll credits are available to small business and qualifying nonprofit employers, including churches. Additionally, a third important provision increases the deductions available to individuals and corporations for 2020 to incentivize giving.
Paycheck Protection Program (“PPP”) Loan for Nonprofit Organizations
As mentioned, the Payment Protection Program (“PPP”) allocates $350 billion for loans to employers including qualified nonprofits with the aim of avoiding massive layoffs. Here is an outline of its provisions for nonprofits.
Eligibility of Nonprofit Organizations and Churches in Particular
The CARES Act defines a nonprofit organization as “an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and that is exempt from taxation under Section 501(a) of such Code.” Thus, 501(c)(3) nonprofit organizations which employ less than 500 people qualify.
Because many churches have never formerly applied for or been granted written 501(c)(3) recognition by the IRS, the question arises, will these churches will be eligible for a PPP loan? Churches, under Section 508(c)(1)(A) of the Code, are not required to formerly apply in order to be considered exempt under Section 501(c)(3). Thus, as per the SBA’s FAQ (4/3/20) question #3, even churches who have not registered with the IRS are eligible for a PPP loan provided that they meet the general 501(c)(3) requirements including: 1) being organized and operated exclusively for religious, educational, scientific or other charitable purposes; 2) having no net earnings that accrue for the benefit of a private individual or shareholder; 3) having no substantial part of the group’s activities that involve attempting to influence legislation or intervening in political campaigns; and 4) providing, upon dissolution, for disposition of all assets to other 501(c)(3) exempt organizations.
Religious Freedom and Moral Concerns
With funding under government programs comes regulations, some of which may restrict a nonprofit’s religious mission. There are a number of certifications that the applicant must make in applying for a loan. Included in these is the certification that the applicant will comply, whenever applicable, with the “civil rights and other limitations in this form.” SBA regulations prohibit discrimination on the basis of race, color, religion, sex, handicap, age or national origin with regard to goods, services or accommodations provided.
Although not monetary, this certification may be considered a real cost and many nonprofits, especially those organized for religious purposes, may be concerned with any restrictions on their freedom of religion and conscience and thus, will want to know more about the regulations to which they may become subject to by accepting the PPP loan funds.
Implementation of the government’s loan programs is in the hands of the Small Business Administration (SBA). As with all governmental benefits, SBA loans come with certain conditions (strings), including complying with federal laws like Title VI of the Civil Rights Act of 1964 and 13 C.F.R. Parts 112, 113, and 117 which prohibits certain types of employment or other discrimination.
The SBA has published Initial Guidance and a Frequently Asked Questions (FAQ) guide on 4/3/20 directed at answering some of these issues for faith-based organizations. In #5 of its initial guidance the SBA states that:
“All loans guaranteed by the SBA pursuant to the CARES Act will be made consistent with constitutional, statutory, and regulatory protections for religious liberty.”
The SBA’s subsequent FAQ guide further supports this protection of religious freedom with the broad statement that the faith-based organization that receives a loan will:
“…retain its independence, autonomy, right of expression, religious character, and authority over its governance, and no faith-based organization will be excluded from receiving funding because leadership with, membership in, or employment by that organization is limited to persons who share its religious faith and practice.”
Specifically, the SBA FAQ affirms that faith-based organizations retain the freedom to hire like-minded employees and to set governing standards for membership. With regard to hiring it states:
“…nothing in [SBA nondiscrimination regulations] 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.”
With regard to membership the guide further states that the loan program will not limit the authority of religious organizations to determine “standards, responsibilities, and duties of members.”
As to concerns for separation of church and state, the SBA FAQ states that the Establishment Clause:
“…does not place any additional restrictions on how faith-based organizations may use the loan proceeds received” through the public health emergency funding in the CARES Act…[The] loans under the program can be used to pay the salaries of ministers and other staff engaged in the religious mission of the institutions.”
Within the two areas that are specifically addressed: 1) religious hiring and 2) religious membership, the ever-expanding discrimination laws put in place by the government seem not to apply to religious organizations, and religious freedom seems to be protected, at least for now.
However, there is another area that remains of concern. SBA’s regulations, including its nondiscrimination policies, still apply with respect to goods, services, or accommodations offered generally to the public by recipients of these loans. The SBA FAQ #5 specifically states:
“5. What legal requirements will be imposed on my organization as a result of our receipt of this Federal financial assistance? Will those requirements cease to apply when the loan is either repaid in full or forgiven?"
"Receipt of a loan through any SBA program constitutes Federal financial assistance and carries with it the application of certain nondiscrimination obligations. Any legal obligations that you incur through your receipt of this loan are not permanent, and once the loan is paid or forgiven, those nondiscrimination obligations will no longer apply."
Consistent with certain federal nondiscrimination laws, SBA regulations provide that the 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. 13 C.F.R. § 113.3(a). But SBA regulations also make clear that these nondiscrimination requirements do not limit a faith-based entity’s autonomy with respect to membership or employment decisions connected to its religious exercise. 13 CFR § 113.3-1(h). And as discussed in Question 4, SBA recognizes the various protections for religious freedom enshrined in the Constitution and federal law that are not altered or waived by receipt of Federal financial assistance."
"SBA therefore clarifies that its regulations apply with respect to goods, services, or accommodations offered generally to the public by recipients of these loans, but not to a faith-based organization’s ministry activities within its own faith community. For example, SBA’s regulations will require a faith-based organization that operates a restaurant or thrift store open to the public to serve the public without regard to the protected traits listed above. But SBA’s regulations do not apply to limit a faith-based organization’s ability to distribute food or clothing exclusively to its own members or co-religionists. Indeed, SBA will not apply its nondiscrimination regulations in a way that imposes substantial burdens on the religious exercise of faith-based loan recipients, such as by applying those regulations to the performance of church ordinances, sacraments, or religious practices, unless such application is the least restrictive means of furthering a compelling governmental interest. Congress enacted the CARES Act to afford swift and sweeping stopgap relief to Americans who might otherwise lose their jobs or businesses because of the economic hardships wrought by the response to the COVID-19 public health emergency, and SBA has a compelling interest in fulfilling that mandate to provide assistance broadly.” (Italics added.)
Thus, if a church or other faith-based organization offers goods, services (programs), or accommodations to a community that is broader than the religious community itself, then that may bring the faith-based organization under the dictates of the SBA’s non-discrimination policies and other strings. Thus, church school, daycare, homeless shelter, food pantry, social services, or accommodations such as making the facilities available to the public for the Scouts, AA, or other meetings; etc., could also trigger the non-discrimination provisions of the loan.
Some faith-based commentators acknowledge that this is problematic, but many indicate they believe the benefit outweighs the risk at this time due to the fact that the loan is short term and lendees may rely on the forgiveness provisions. As stated in the FAQ:
“Any legal obligations that you incur through your receipt of this loan are not permanent, and once the loan is paid or forgiven, those nondiscrimination obligations will no longer apply.”
Whether it could be argued that a faith-based applicant had obtained the loan fraudulently if its policies in place at the time of the loan violate anti-discrimination laws or other SBA regulations remains a question not fully answered at this time.
While it seems that the majority of faith-based organizations are inclined to apply for government assistance in this case by likening it to temporary emergency relief, there are a number of religious organizations that view the benefit/risk analysis from a long-term basis and come to the opposite conclusion. Even if the short-term risk of being saddled with government restriction on ministry seems small, to some the receipt of government funds for operation of religious mission involves the moral hazard of dependence. One such group raising this question is the Acton Institute:
“Moral hazard is a term commonly used to describe those situations when a person or institution is effectively insulated from the possible negative consequences of their choices. This makes them more likely to take risks that they would not otherwise take, most notably with assets and capital entrusted to them by others. The higher the extent of the guarantee, the greater is the risk of moral hazard. These faith-based organizations, while acknowledging the short-term benefits that may accrue from reliance on the government, look at the long-term effects of this dependence and the inevitable accompaniment of strings that will be attached. In a recent seminar on COVID-19, Acton’s President, Father Sirico, likened our current situation in the long run to that of the Israelites in 1 Samuel 7 where they came to Samuel and said, “we want a king like the surrounding nations.”
The Main Benefits of the Paycheck Protection Program
Provided that a nonprofit organization decides to apply for the loan, the PPP allows small businesses and nonprofits, including churches, to apply for 100% federally-guaranteed loans to assist with short-term cash flow. Funds received under PPP loans may not be used to pay emergency sick or family leave or to pay employees over $100,000 annually. The main benefit of a PPP loan is that the principal amount of the loan may be forgiven, as explained in more detail below. For principal amounts of the PPP loan that remain after any loan forgiveness, borrowers may defer payment for at least 6 months but not more than a year. In sum, PPP borrowers can get a substantial portion of their loan forgiven for the amount incurred in the first 8 weeks after the loan is issued and do not have to make any payments for up to a year.
What Lenders Will Look At and the Application Process
Although the program is administered by the Small Business Administration (“SBA”), the loans are being distributed through private lenders. The deadline for applying for PPP loans is June 30, 2020. Lenders will consider whether the entity was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes or paid independent contractors. Of course, the funds are limited and given the demand may run out. Immediate action is therefore recommended for those determining to apply for the loan.
The borrower will also be asked to make a good faith certification that the current economic conditions make the loan request necessary to support the entity’s continuing operations.
Amount of the Loan
The loan is likely to amount to 2.5 times the borrower’s average monthly payroll costs, though no loans can be higher than $10 million. PPP loans are unsecured, and do not require a personal guarantee.
As mentioned above, loan forgiveness is available for the amount the borrower spent on certain expenses during the 8-week period starting from the time the loan was given. The expenses include payroll costs, health care benefits and premiums, employee wages, rent, utilities and interest on mortgages. The amount eligible to be forgiven will be reduced in the event of employee layoffs or pay cuts. The general rule is that to obtain the full benefit of loan forgiveness, businesses must keep their employees on and pay them at a rate of at least 75% of their prior-year compensation for the period of February 15th through June 30th, 2020. In order to qualify for loan forgiveness, borrowers will be required to submit certain documentation and certifications verifying employment and payroll levels of its employees during the loan period as well as the expenditures for which the loan funds were actually spent and could be subject to audit. Note that forgiven loan amounts will not be treated as taxable income.
While there is no immediate process available today to apply for a PPP loan, regulations are expected to be released soon. In the meantime, each nonprofit organization should be considering the fundamental question of whether it is necessary and appropriate for their organization to take federal assistance by applying for a PPP loan. If so, as with any loan, assembly of the necessary financial and other documentation should begin immediately. Those considering application may also want to contact their current bank or other preferred lender now to determine whether they are or will become a SBA-certified lender for PPP loans.
Emergency Family and Medical Leave Expansion Act (FMLA+) and the Emergency Paid Sick Leave Act (EPSLA) As Applied to Nonprofits and Churches
As was set out in Mauck & Baker’s Families First Coronavirus Response Act guide, beginning April 1, 2020 through December 31, 2020 small and midsized businesses (under 500 employees) are required to provide paid family and sick leave to their employees under the newly enacted Emergency Family and Medical Leave Expansion Act (FMLA+) and the Emergency Paid Sick Leave Act (EPSLA), or (“the Acts”). Nonprofit employers, including churches and religious organizations are included in this mandate.
As mentioned in more detail in Mauck & Baker’s Families First Coronavirus Response Act guide, these employers must now provide the paid leave to their employees who take leave because of one of six specified COVID-19 related absences. To offset this expense, the Acts offer the employer the ability to recoup dollar-for-dollar, the expense of providing for an employee’s COVID-19 related leave and health insurance costs paid between April 1 and December 31, 2020 (It should be noted at the outset, teleworking is counted as work and not leave so that payroll or other expenses in connection with these employees will not be recoupable).
The mechanism for reimbursement is by way of a credit taken by the employer on its quarterly federal 941 tax return. Form 941 is the form by which an employer pays and reports withholdings from its employees’ wages for their income, Social Security, and Medicare taxes as well as for the employer’s share of their Social Security and Medicare taxes. The Acts authorize the employer to deduct from its quarterly payroll tax payment to the IRS the amount that it paid for emergency leave. As mentioned above, the Acts also covers reimbursements for health insurance payments made on behalf of the employee on leave. If the amount that the employer is entitled to deduct from its quarterly payment is insufficient to cover the full expense, then it may file with the IRS for a refund for the remainder.
Pastors/ministers enjoy a special and complicated tax status under the Tax Code which complicates recovery of the credit under the Acts. Many churches categorize their pastors/ministers as employees and issue them a W-2 for federal income tax purposes. Other pastor/ministers are treated as self-employed. However, all pastors are categorized as self-employed for Social Security and Medicare purposes. As such, if not exempt, they pay individually for their Social Security and Medicare benefits. Under the Tax Code, funds paid to a pastor/minister do not qualify as “wages”. Accordingly, under FMLA+ and EPSLA, they are not “qualified” sick leave or family leave wages for which the credit is available to the church as employer. While the credit is not available to the church employer, it is available to the pastor\minister on leave because FMLA+ and EPSLA provide for a credit for a self-employed individual against his or her income tax, even though it is the church paying for his or her leave.
Charitable Giving Incentivized
The CARES Act also recognizes that nonprofits and churches will be significantly impacted through decreased giving as a result of the pandemic. A $300 deduction, above the standard deduction for those who do not itemize will be allowed for 2020 to stimulate giving. Moreover, for 2020 the individual charitable deduction will not be capped at 50% of AGI for those who do itemize. Similarly, the cap for corporations’ charitable deductions will more than double to 25%.
The ink on the monumental Emergency Family and Medical Leave Expansion Act (FMLA+), the Emergency Paid Sick Leave Act (EPSLA), and on the CARES Act has barely dried and the final regulations have yet to be published. While interim guidance has been issued involving faith-based organizations, some questions remain, and the specific details of the regulations governing PPP loans and qualified sick or family leave pay and corresponding employer credits continue to develop. In addition, there are a number of other provisions that will apply to nonprofits not outlined here. Many of you will have questions and issues based on your church or nonprofits’ specific circumstances, the needs of your employees, and of your finances. Please feel free to contact us for more guidance and specifically tailored legal advice for your nonprofit organization.
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