CARES Act could bring financial relief to churches and nonprofits amidst bans on large gatherings

by John Litzler on March 30, 2020 in News

Editor's Note: This information was updated on April 2 to reflect clarifications made by the Small Business Administration. 

On March 27, the U.S. House of Representatives approved by voice vote the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The $2.2 trillion coronavirus relief package, which was Senate Bill 3548, was also unanimously passed by the U.S. Senate on March 24. A large portion of that relief, $349 billion, will fund the Paycheck Protection Program (PPP). View this helpful presentation to better understand how this legislation may impact your church or nonprofit. 



The goal of the PPP is to help support the ongoing operations of small businesses by allowing them to make payroll and retain their employees. The Program does not exclude churches or other religious nonprofits from applying for loans. Additionally, up to 100 percent of a PPP Loan may be forgiven, effectively turning the “loan” into a grant depending on certain spending criteria. This is welcome news as many nonprofits could be forced to close as a result of the coronavirus pandemic without some form of economic relief. 

Who is eligible for the Paycheck Protection Program?

Eligible recipients of a covered loan from the PPP include any business concern (an individual or an entity), nonprofit organization, veterans organization, or Tribal business concern that employs no more than 500 employees and certifies that the uncertainty of current economic conditions make necessary the request for a loan to support ongoing operations. Both full-time and part-time employees are counted as well as seasonal and other types of employees. The Small Business Administration (SBA) may increase the number of employees and there may be some other exceptions that apply to organizations with over 500 employees as well. The applicability of the Program to entities with over 500 employees is less clear. 

Under a different section, the CARES Act refers to an organization that employs no more than 500 employees “per physical location.” This language has led some to speculate whether a large employer with multiple physical locations (e.g. a megachurch with several campuses) could be eligible for the program. However, most churches and Christian nonprofits will easily be under the 500-employee threshold and therefore eligible to apply. 

Under the Act, a nonprofit organization is any organization described in Section 501(c)(3) of the Internal Revenue Code and that is exempt from Section 501(a) of the Internal Revenue Code. It’s important to note that the IRS automatically treats all churches as tax-exempt even if they have not applied for 501(c)(3) status or if they claim such status under the umbrella of a larger 501(c)(3) organization. For this reason, every church with fewer than 500 employees should be considered an eligible recipient. 

What time period does the CARES Act cover?

The CARES Act defines the covered period as the period beginning February 15, 2020, and ending June 30, 2020. These dates are important for calculating the amount of the loan and eligibility for loan forgiveness. 

How do we determine our loan amount?

An organization can determine the loan amount for which it is eligible by multiplying its average monthly payroll costs for a time period of 1-year before the application for the loan is made by 2.5. Payroll costs include:

  • salary, wages, commission, or similar compensation
  • payment of cash tips or equivalent
  • payment for vacation, parental, family, medical, or sick leave
  • allowance for dismissal or separation
  • payments for group healthcare benefits including insurance premiums
  • payments for retirement benefits
  • payments of State or local assessed taxes on employee compensation

However, the compensation of an individual employee in excess of an annual salary of $100,000 will not count toward the payroll costs. For churches and religious nonprofits, this is most likely to occur with the salary of an organization’s Senior Pastor or Executive Director. 

Predictably, the CARE Act does not address a minister’s housing allowance. Those types of issues are too detailed for this early stage of the process. While the SBA may eventually pass rules and guidelines addressing such matters, the CARES Act only defines the Paycheck Protection Program in broad terms. There are some other exceptions when calculating payroll costs. For example, the compensation for any employee with a principal place of residence outside of the United States cannot be counted toward payroll costs. A Paycheck Protection Loan may not exceed $10 million. 

Example: Church “A” applies for a Paycheck Protection Loan on April 1, 2020. From April 2019 through March 2020 Church “A” had payroll costs of $625,000. However, during that time period, the Senior Pastor’s compensation was $125,000. For the purpose of calculating the loan, $25,000, the amount of the pastor’s compensation in excess of $100,000, will not be counted in the payroll costs. This means that Church “A” has an annual payroll cost of $600,000. Church “A” should divide that amount by 12. The monthly payroll cost of Church “A” is $50,000. Church “A” is eligible to apply for a Paycheck Protection Loan in the amount of $125,000 (the monthly payroll cost multiplied by 2.5).

What if our Christian nonprofit has only existed for a few months?

Many churches and Christian nonprofits only came into existence in recent months. Although those organizations do not have a full year of payroll costs, they are still eligible to apply for a PPP Loan, provided the organization was in existence prior to February 15, 2020. The method for calculating monthly payroll costs for these organizations is using the payroll costs from January 1, 2020 to February 29, 2020 and dividing by two. 

What can a Paycheck Protection Loan be used for?

While the loan amount is based on payroll costs from the 1-year period prior to applying, the funds can be used for many things in addition to the organization’s payroll costs. PPP Loans may be used toward payroll costs, contributions to healthcare benefits (paid sick, family medical leave and insurance benefits), employee salary and compensation, interest payments on a mortgage, rent, utilities, and any other debts the organization incurred prior to February 15, 2020 (the beginning of the covered period).

What was the part about Paycheck Protection Loans being forgiven?

Up to 100 percent of a PPP Loan may be forgiven, effectively turning the “loan” into a grant. Whether a Paycheck Protection Loan is forgiven under the program depends on (1) when the funds are spent, (2) the purpose for which the funds from the loan were spent, and (3) the number of the organization’s full-time employees. Any funds spent on payroll costs, interest on a mortgage, to pay a rent obligation, or to cover a utility payment during the covered period are eligible for forgiveness. The covered period is the 8-week period beginning on the date of the origination of the loan.

The method for determining the amount of the loan that will be forgiven is calculating the percentage difference between the average number of the organization’s full-time employees per month during the covered period (February 15 – June 30, 2020) and either (1) the number of the organization’s full-time employees from February 14 – June 30, 2019 or (2) the number of the organization’s full-time employees from January 1 – February 29, 2020 and then reducing the total loan amount by that percentage. 

In other words, any organization that averages the same or more full-time employees during the covered period than it averaged during this same time last year will be eligible to have its entire loan forgiven. Additionally, the amount of loan forgiveness will be reduced by any reduction in total salary or wages of any employee in excess of 25%. In other words, if an organization cuts salary by 30% between now and June 30, then the total amount of loan forgiveness for which the organization would have been eligible will be reduced by 5%. 

The rules may seem complicated, but the intent is simple. The purpose of the Paycheck Protection Program is to help organizations stay afloat by covering the payroll costs of the organization’s employees. An organization that accepts a loan and then terminates its employee or significantly reduces the employee’s compensation is behaving in a manner inconsistent with the purpose of the loan. 

Under the Program, the SBA must waive any of its fees associated with the loan. The lender (bank, credit union, etc.) may not charge a fee in excess of the limit set by the SBA. That amount hasn’t been determined yet. Similarly, the interest rate for any portion of the loan that is not forgiven has not been set either. However, the CARES Act states that the interest rate cannot exceed 4 percent. Borrowers will have 10 years to pay back any loan amount in excess of what is forgiven, and no payments will be due until after 2020.

Example: Nonprofit “B” borrowed $100,000 through a Paycheck Protection Loan. 100% of the funds from the loan went to payroll costs, utilities, and rent payments within 8 weeks from the origination of the loan. As a result, Nonprofit “B” files an application seeking forgiveness of 100% of the loan. Nonprofit “B” averaged 11 full-time employees from February 15, 2019 to June 30, 2019. Nonprofit “B” averaged 10 full-time employees from January 1, 2020 to February 29, 2020 and averaged 9 full-time employees during the covered period (February 15 - June 30, 2020). Nonprofit “B” elects to use the time period from January and February. During the covered, period Nonprofit “B” averaged 90% of the full-time employees it averaged in January and February. As a result, 90% of the Paycheck Protection Loan Nonprofit “B” received will be forgiven. The remaining 10% ($10,000) will be due over the next 10 years at an interest rate of no more than 4% and no payments will be due until January 1, 2021. 

Attorney John Litzler directs the church law division of Christian Unity Ministries in San Antonio. He also serves as a BGCT legal consultant to assist Texas Baptist churches in understanding various legal issues.

Disclaimer: This article provides general information and a general understanding of the law and does not constitute specific legal advice. This is information for your church to consider and not a recommendation to apply. By utilizing the Texas Baptist website, you understand that there is no attorney/client relationship between you/your church and the author or between you/your church and the Baptist General Convention of Texas. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state with the specifics of your situation.

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