What the CARES Act Means for Churches and Church Staff

Key point. Some members of Congress are suggesting that a fourth package may be necessary.

• Any child who is a qualifying child for the purposes of the Child Tax Credit is also a qualifying child for the purposes of the recovery rebate. In general, a child is any dependent of a taxpayer under the age of 17.

• Individuals with $0 of income are eligible for a rebate so long as they are not the dependent of another taxpayer and have a work-eligible Social Security Number.

• College students are eligible for a recovery rebate only if they are not considered a dependent of their parents. Generally, full-time college students under the age of 24 are considered a dependent if their parent(s) provide more than half of their support. Rebates sent via direct deposit will take a few weeks.

• Rebates sent via checks may take a few months.

Key point. For the vast majority of Americans, no action on their part will be required to receive a rebate check since the Internal Revenue Service (IRS) will use a taxpayer’s 2019 tax return if filed (or their 2018 return if they haven’t filed their 2019 return). This includes many individuals with very low income who file a tax return despite not owing any tax in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit.

Key point. To illustrate, a family of four is eligible for a $3,400 rebate.

Key point. The rebate is treated like other refundable tax credits, such as the child tax credit and earned income tax credit, and is not considered taxable income.

Key point. The rebate amount is reduced by $5 for each $100 that a taxpayer’s adjusted gross income (AGI) exceeds the phase-out threshold. The threshold is $75,000 for single taxpayers and $150,000 for married persons filing jointly. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

Key point. A coronavirus-related distribution is one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Key point. The CARES Act provides that if an eligible employer receives a forgivable loan under the Paycheck Protection Program (see below) it is not eligible for the employee retention credit under this section.

Key point. Most churches are unfamiliar with US Small Business Administration (SBA) loans, including this newly created Paycheck Protection Program. For assistance, contact your nearest Small Business Development Center (SBDC). The SBA website lists local centers and has more information about approved lenders.

• the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19; and
• they will use the funds to retain workers and maintain payroll, lease, and utility payments.

Here are two examples provided by the SBA illustrating how to calculate the maximum amount of a loan:

Example 1: No employees make more than $100,000

Annual payroll: $120,000

Average monthly payroll: $10,000

Multiply by 2.5 = $25,000

Maximum loan amount is $25,000

Example 2: Some employees make more than $100,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Maximum loan amount is $250,000

• payroll costs (the SBA requires at least 60 percent of the loan eligible for forgiveness be used for payroll costs)
• group health care expenses
• interest on any mortgage obligations
• rent, including rent under a lease agreement
• interest on debt incurred before February 15, 2020
• utilities

Key point. The SBA released an updated “frequently asked questions” document on April 26, 2020, in which it states that a minister’s housing allowance is considered part of “payroll costs.” The document includes this question and answer:

Question: Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?

Answer: Yes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.

Key point. If an eligible employer receives an employee retention credit (see above), it is not eligible for the Paycheck Protection Program.

Key point. The SBA has issued a fact sheet providing additional specific details about the Paycheck Protection Program loans, along with the application form to use.

Key point. Because churches and religious organizations are eligible for the Paycheck Protection Program, this provision will likely be challenged in court as an unconstitutional establishment of religion in violation of the First Amendment. But note:

(1) Any legal challenge will be hampered by the fact that this program ends on December 31, 2020, and

(2) The United States Supreme Court has ruled that laws benefiting a wide range of secular nonprofit organizations are not rendered unconstitutional by the fact that religious organizations are included among the beneficiaries. To illustrate, in 1970 the Court upheld the constitutionality of a New York law exempting churches from property taxes, in part because property used for religious purposes was but one of a wide variety of classifications of property that were exempted from tax. The state had not singled out churchowned property for the exemption, but rather it had included such property in a long list of other exempted properties owned by organizations whose activities the state had decided were socially desirable and deserving of protection through exemption from tax. Walz v. Tax Commission, 393 U.S. 664 (1970).

Similarly, in 1989 the United States Supreme Court ruled that a Texas law exempting religious periodicals from state sales tax violated the First Amendment’s nonestablishment of religion clause. Texas Monthly, Inc. v. Bullock, 109 S. Ct. 890 (1989). From 1984 until 1987 Texas law imposed a sales tax upon all periodicals except those “published or distributed by a religious faith and that consisted wholly of writings sacred to a religious faith.” This law was challenged by a secular publisher, and the United States Supreme Court agreed that the Texas law violated the First Amendment’s ban on the establishment of religion.

But the Court stressed that “insofar as a tax exemption is conferred upon a wide array of nonsectarian groups as well as religious organizations in pursuit of some legitimate secular end, the fact that religious groups benefit incidentally does not [violate the First Amendment].” The court emphasized that if Texas chose to grant a tax exemption to “all groups that contributed to the community’s cultural, intellectual, and moral betterment, then the exemption for religious publications could be retained.” The court specifically ruled that a statute exempting organizations created for “religious, educational, or charitable purposes” from the payment of state sales tax would be a “model” exemption statute.

This precedent strongly suggests that any constitutional challenge to the inclusion of religious groups in the Paycheck Protection Loan Program will fail.

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 . . . 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.

Second, the SBA issued an “Interim Final Rule” on April 2, 2020, that states, in part:

All loans guaranteed by the SBA pursuant to the CARES Act will be made consistent with constitutional, statutory, and regulatory protections for religious liberty, including the First Amendment to the Constitution, the Religious Freedom Restoration Act . . . and SBA regulation at 13 C.F.R. 113.3-1h, which provides:

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.

And third, the so-called ministerial exception, which prohibits the civil courts from resolving employment disputes between churches and clergy, likely would allow churches to participate in an SBA loan program even if they discriminate on the basis of biblical standards in the employment of clergy.

Is my faith-based organization disqualified from any SBA loan programs because it is affiliated with other faith-based organizations, such as a local diocese?

Not necessarily. Under SBA’s regulations, an affiliation may arise among entities in various ways, including from common ownership, common management, or identity of interest. 13 C.F.R. 121.103 and 121.301. . . . Some faith-based organizations likely would qualify as “affiliated” with other entities under the applicable affiliation rules. Entities that are affiliated according to SBA’s affiliation rules must add up their employee numbers in determining whether they have 500 or fewer employees.

But regulations must be applied consistent with constitutional and statutory religious freedom protections. If the connection between your organization and another entity that would constitute an affiliation is based on a religious teaching or belief or is otherwise a part of the exercise of religion, your organization qualifies for an exemption from the affiliation rules. For example, if your faith-based organization affiliates with another organization because of your organization’s religious beliefs about church authority or internal constitution, or because the legal, financial, or other structural relationships between your organization and other organizations reflect an expression of such beliefs, your organization would qualify for the exemption. If, however, your faith-based organization is affiliated with other organizations solely for non-religious reasons, such as administrative convenience, then your organization would be subject to the affiliation rules. SBA will not assess, and will not permit participating lenders to assess, the reasonableness of the faith-based organization’s good-faith determination that this exception applies.

The CARES Act was designed to mitigate the economic effects of the COVID-19 pandemic in a variety of ways. The CARES Act includes a provision of temporary benefits for individuals who have exhausted their entitlement to regular unemployment compensation as well as coverage for individuals who are not eligible for regular unemployment compensation . . . . These individuals may include . . . clergy and those working for religious organizations who are not covered by regular unemployment compensation, and other workers who may not be covered by the regular unemployment compensation program under some state laws.

Key point. This provision is especially relevant to pastors who typically use the estimated tax procedure to prepay their federal taxes since they are exempt by law from income tax withholding.