Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136), Signed into law on March 27, 2020

Updated as of April 7, 2020

While Treasury and Small Business Administration (SBA) Regulations and other guidance continue to provide implementation details for the CARES Act, the following represents our current understanding of the Act relating to the issues of the most interest to churches and nonprofits:

• Above-the-line deduction for charitable contributions. This provision was strongly promoted by ECFA. We urged Congress to provide a much larger deduction (often referred to as the Universal Charitable Deduction) to individual taxpayers and to make the provision permanent. We supported the Lankford amendment, which would have provided a universal deduction for gifts up to one-third of the itemized deduction, but it was not included in the Act.

  While the CARES Act provides for above-the-line deductions for charitable contributions, the deduction is limited to only $300 and it only applies to the 2020 tax year. While there have been reports that this is a permanent provision in the law, we believe the wording of the Act does not support this conclusion.  Section 2204.

• Limitation on charitable contributions. The CARES Act encourages individuals to contribute to churches and charitable organizations in 2020 by relaxing some of the limitations on charitable contributions:

  • Suspending the 60% adjusted gross income limitation on individuals and increasing it to 100% (Observation: This change will especially be advantageous to major donors),
  • increasing to 25% the 10% limitation on corporations,
  • and increasing to 25% the 15% limitation on food inventory.

  The suspension of the individual contribution limitation is only for cash gifts that go to a public charity. If a donor gives cash to, say, a private foundation, the old deduction rules apply. And while the organizations that manage Donor-Advised Funds are public charities, a donor does not get the higher deduction for donating cash to a Donor-Advised Fund. 

  If a donor’s assets are substantial enough that they can give more than their taxable income this year, they won’t lose the deduction for the excess amount. They can carry forward the unused deduction to the next year, as has always been the case.  Section 2205.

• Payroll Protection Program (PPP) loans/grants. The CARES Act is an emergency loan program based on the Small Business Administration’s (SBA) 7(a) loan process. For the period from February 15, 2020 to June 30, 2020, the law allows the SBA to provide $349 billion of 100% federally backed loans to eligible organizations (500 or fewer employees.) Any person on the payroll (full- or part-time) is included as one employee regardless of hours worked or temporary status. (We are aware that some lenders are using an FTE calculation instead of a head count.) The loans are available through SBA-approved banks and financial institutions.

  The program is available to 501(c)(3) nonprofit organizations, including churches. Note: Churches, integrated auxiliaries of churches, and conventions or associations of churches qualify for the PPP (and EIDL) loans as long as they meet the requirements of Section 501(c)(3) of the Internal Revenue Code and all other PPP (and EIDL) requirements. Such organizations are not required to apply to the IRS to receive tax-exempt status.

  An FAQ document issued by the SBA contains explicit assurances to faith-based organizations about matters related to religious exercise. SBA guidance seems to permit use of the 2019 calendar year for measurement purposes. Gross wages for calendar year 2019 would be before pretax deductions for 401(k), 403(b), flexible spending accounts, etc. It seems reasonable to include the ministerial housing allowance in gross wages, pending subsequent guidance.

  It is our understanding that payment to independent contractors reported on Form 1099 are not includible in payroll costs.  Section 1102.

  The maximum loan amount (capped at $10 million) is generally 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made. There are special rules for seasonal employers and organizations not in existence for a full year prior to the loan date. 

  In determining payroll costs, the following are included:

  • Salaries and other wages
  • Employer-paid health care benefits
  • Employer-paid retirement benefits
  • Employer-paid state and local payroll taxes

  In determining payroll costs, the following are excluded:

  • Compensation of an employee in excess of an annual salary of $100,000
  • Federal payroll taxes
  • Compensation of an employee whose principal place of residence is outside of the U.S.
  • Emergency sick leave or emergency family leave payments that qualify for a credit under the Families First Coronavirus Response Act

  There are no personal loan guarantees and no recourse to any individuals unless the loan funds are used for an unauthorized purpose. There are very few borrower requirements to obtain a loan under the new program. Those requirements include (but are not limited to):

  • a good-faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower,
  • the funds will be used for payroll costs, paid sick, medical, or family leave, mortgage interest (but not principal), interest on other debt obligations incurred before February 15, 2020, rent, and utilities,
  • the borrower was in operation on February 15, 2020, and
  • the borrower had employees for whom it paid salaries and payroll taxes of independent contractors as reported on Form 1099-MISC as of February 2020.

  Michael Batts, CPA and Managing Partner, Batts Morrison Wales & Lee, is encouraging grant recipients to open a separate checking account in which grant funds would be deposited and approved expenses made. ECFA fully agrees with this approach as providing an extra layer of accountability for these funds.

  One of the biggest advantages of the program is that employers that maintain employment between March 1 and June 30, 2020 are eligible to have their loans forgiven, essentially turning the loan into a grant. The forgiveness amount is reduced by an amount calculated under a formula designed to measure whether the borrower reduced its workforce during a specific period in early 2020. The forgiveness provisions are intended as an incentive to retain employees. Amounts not forgiven are subject to an interest rate of 1% per annum over a maximum of 2 years.  Section 1106.

  Click here for the loan/grant application. Also, click here for the information sheet for borrowers, and here for a fact sheet. Note: While the Form 940 (Employer’s Annual Federal Unemployment Tax Return) may be requested by lenders, churches and nonprofits recognized as 501(c)(3) organizations are exempt from filing Form 940. Thus, submitting Form 940 is not required.

• Economic Injury Disaster Loans (EIDL).  The Act eliminates creditworthiness requirements so the eligible nonprofits (including churches) and other applicants with fewer than 500 employees can get checks for $10,000 within three days under SBA’s 7(b) loans (as distinguished from SBA’s 7(a) Payroll Protection Program loans – see above.)

  The $10,000 advance may be used for paid sick leave, meeting payroll, increased costs due to disrupted supply chain, mortgage, and debt service. The $10,000 advance is not required to be repaid.

  To apply online for an EIDL, click here or apply by phone at 1-800-659-2955 through the SBA Customer Service Center.   Section 1110.

• Mid-Size Loan Program.  This loan program is largely undefined. It will be created by the Treasury Department to fill the gap between the Paycheck Protection Program for smaller employers and the industry stabilization loans to big business. This program will be available to organizations with between 500 and 10,000 employees.   Section 4003.

• Deferral of payment of employer payroll taxes.  Effective with the date of enactment of the CARES Act, employers may defer payment of employer payroll taxes attributable to wages paid during 2020 with 50% due December 31, 2021, and the remaining 50% deferred to December 31, 2022.

  Note: This provision is not available to an employer who has had its debt forgiven in connection with the Payroll Protection Program.

  For the purposes of this provision applicable to churches and other nonprofit organizations, payroll taxes is only the employer’s portion of Federal Insurance Contribution Act (FICA) -- 6.2%, not the 1.45% Medicare Tax. Caution: This provision is not like a loan that can be renegotiated when it comes due. The IRS will expect to be paid the amount of employer’s FICA taxes on December 31, 2021 and December 31, 2022.  Section 2302.

• Employee retention payroll tax credit.  The Act creates a refundable payroll tax credit (offset against an organization’s social security tax liability) of up to $5,000 for each employee on the payroll when certain conditions are met. For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021.

  Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

  • Have business operations fully or partially suspended operations due to orders from a governmental entity limiting commerce, travel, or group meetings; or

  • Experience a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year. For churches and nonprofit organizations, the entity’s whole operations must be taken into account when determining the decline in revenues.

  This provision is not available to an employer who has had its debt forgiven in connection with the Payroll Protection Program. Click here for the IRS notice on this credit.  Section 2301.

• Unemployment issues.  The CARES Act appears to provide a flat amount of $600 per week in addition to what an individual may qualify for under state unemployment systems. The payments will be paid by state unemployment agencies as Disaster Unemployment Benefits.

  The Act provides unemployment benefits to unemployed workers from churches, religious organizations, and small nonprofits where employment would not normally be covered under state unemployment laws.

  The Act provides federal funding to assist nonprofits that have elected the reimbursement method for participation in state unemployment coverage. The federal government will reimburse the state unemployment agencies 50% of reimbursed benefits paid to the government and nonprofit employers who elected to be a reimbursing employer.  Section 2103.

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