Legal Sidebari

Eligibility of Religious Organizations for the
CARES Act’s Paycheck Protection Program
April 9, 2020
The recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contained a
number of provisions authorizing the Small Business Administration (SBA) to provide economic relief to
small organizations. One such provision, Section 1102 of the CARES Act, established the Paycheck
Protection Program (PPP), which expands the SBA’s authority to guarantee loans under Section 7(a) of
the Small Business Act, discussed in more detail in this CRS Report. Another provision, Section 1110 of
the CARES Act, expands the SBA’s authority to grant Economic Injury Disaster Loans (EIDLs) under
Section 7(b)(2) of the Small Business Act, discussed in this CRS Report. After the CARES Act was
signed into law, there was some uncertainty about whether religious organizations, including churches and
other houses of worship, would be eligible for the new PPP or EIDL relief. On April 3, 2020, however, the
SBA issued a Frequently Asked Questions (FAQ) document clarifying that “faith-based organizations,”
including houses of worship, “are eligible to receive SBA loans” under the PPP and EIDL programs. This
Legal Sidebar discusses legal considerations related to religious organizations’ eligibility for SBA aid.
Specifically, this Sidebar explores possible considerations under the Establishment and Free Exercise
Clauses of the First Amendment to the U.S. Constitution, both of which are implicated when public funds
are provided to religious organizations.
Statutory and Regulatory Authority Governing Section 7(a) Loans
According to the SBA, the 7(a) loan program is the agency’s “primary program for providing financial
assistance to small businesses.” Section 7(a) of the Small Business Act authorizes the SBA to make and
guarantee certain types of loans. In practice, the SBA does not provide direct loans under its 7(a)
programs, but works with third-party lenders. Prior to the CARES Act amendments, the statute provided
that 7(a) loans were generally available to “small business concerns,” defined in regulation as certain
small for-profit businesses. Another regulation outlining what businesses are ineligible for 7(a) loans
excludes “businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or
religious beliefs, whether in a religious or secular setting.” When the SBA adopted this ineligibility
regulation in 1996, the agency explained that the exclusion of primarily religious businesses was driven
by Establishment Clause concerns.
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LSB10445
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Amending Section 7(a) of the Small Business Act, Section 1102 of the CARES Act created the PPP,
authorizing the SBA to guarantee certain third-party loans made to eligible organizations during a
specified time period. PPP loans can be used for payroll costs, rent and mortgage interest payments,
utilities, and other specified costs. Section 1102 further provides that, in contrast to other 7(a) programs
that are solely available to small for-profit businesses, the PPP is available to small “nonprofit
organizations.” To fall within the meaning of that term, an entity must first qualify as an organization
under 26 U.S.C. § 501(c)(3), which includes any corporation “organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or educational purposes.” Second, the
organization must be tax-exempt under 26 U.S.C. § 501(a), which states that an organization described in
§ 501(c)(3) “shall be exempt from taxation.” Ordinarily, organizations must notify the Internal Revenue
Service (IRS) that they are applying for tax-exempt status, although 26 U.S.C. § 508(c)(1) exempts
churches from these statutory application requirements. Accordingly, religious organizations, including
churches, qualify as a nonprofit organization under the CARES Act if they are (1) “organized and
operated exclusively for religious . . . purposes”; and (2) considered tax-exempt by the IRS.
Section 1106 of the CARES Act relates to forgiveness of Section 1102 loans. It provides that “an eligible
recipient shall be eligible for forgiveness” on these loans for payroll costs, rent or mortgage interest, and
utilities paid during the covered period. Recipients seeking loan forgiveness may apply to their lenders,
and the lenders determine whether the recipients are eligible for forgiveness. Once “the amount of
forgiveness . . . is determined,” the SBA “shall remit to the lender” the amount forgiven, plus interest.
Statutory and Regulatory Authority Governing Economic Injury Disaster Loans
The SBA is also authorized to make “disaster loans,” if the President or SBA Administrator declares that
certain disasters have occurred. Eligible entities may apply directly to the SBA for these loans, which can
be used for “working capital necessary to carry [the business] until resumption of normal operations” and
for normal business operating expenses “necessary to alleviate the specific economic injury.” Even prior
to the CARES Act, the SBA could, in contrast to the 7(a) program, make loans to qualifying “private
nonprofit organization[s],” defined by regulation as an entity that the IRS or a state government has
determined to be a tax-exempt nonprofit. Accordingly, an organization deemed tax-exempt by the IRS
under 26 U.S.C. § 501(c)(3) qualifies as a “private nonprofit organization” under this regulation. Similar
to the 7(a) program, another SBA regulation makes certain businesses ineligible for EIDLs, including
businesses “principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious
beliefs, whether in a religious or secular setting.”
Section 1110 of the CARES Act alters the SBA’s EIDL authority, temporarily expanding eligibility for
these loans and relaxing certain requirements. That section also authorizes the SBA to give advances on
covered loans and provides that applicants will not be required to repay those advances (although the
advance amount may reduce the amount of loan forgiveness granted under the PPP). Section 1110 does
not expressly address nonprofits’ or religious organizations’ eligibility for the new EIDL authorities.
SBA Guidance on Eligibility of Religious Organizations for the PPP and EIDLs
Initially, there was some question regarding whether religious organizations would be eligible to
participate in the PPP or for EIDLs, given existing SBA regulations excluding certain religious entities
from 7(a) programs and the EIDL program, as well as an interim final rule on the PPP that did not
specifically address religious organizations’ eligibility. On April 3, however, the SBA issued an FAQ
document expressly stating that religious organizations would be eligible to participate in both the PPP
and the EIDL program notwithstanding any regulations to the contrary. The SBA further clarified that
churches and other houses of worship would qualify under both programs even if the IRS had not
confirmed their tax-exempt status, so long as they met the definition in 26 U.S.C. § 501(c)(3) and other
program requirements. On April 4, the SBA also issued an interim final rule providing that religious

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organizations would be exempt from its affiliation rules—which govern when one entity is considered to
be affiliated with another, for purposes of determining an organization’s size—if applying those rules
“would substantially burden those organizations’ religious exercise.”
The April 3 SBA guidance stated that religious organizations accepting federal funds are generally subject
to conditions that would ordinarily apply to any other organizations accepting SBA aid. For example, the
SBA stated that religious organizations accepting funds would generally have to comply with regulations
prohibiting “recipients of financial assistance” from discriminating on the basis of “race, color, religion,
sex, handicap, or national origin” when they provide goods and services or when they make employment
decisions. However, the SBA emphasized in the guidance that existing exclusions for religious
organizations would continue to apply—and that religious organizations can seek further relief if SBA
rules burden their religious exercise. For example, a separate SBA regulation provides that the
nondiscrimination regulation does not prevent a religious organization from selecting members or
employees “of a particular religion to perform work connected with the carrying on” of the organization’s
religious activities. Interpreting these quoted regulatory provisions, the SBA guidance said that the SBA
would “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” in its nondiscrimination regulation. At the
same time, the guidance stated that the regulations do not “limit a faith-based organization’s ability to
distribute food or clothing exclusively to its own members or co-religionists.”
Finally, in the April 3 guidance, the SBA raised broader constitutional concerns about its regulations
excluding religious businesses, stating that it would “decline to enforce” these regulatory provisions and
“will propose amendments to conform those regulations to the Constitution.” This statement suggests that
the SBA will not be enforcing the named regulatory provisions beyond the PPP and EIDL authorities in
CARES Act, even in preexisting loan programs. Going forward, the SBA said that “no otherwise eligible
organization will be disqualified from receiving a loan because of the religious nature, religious identity,
or religious speech of the organization.”
Constitutional Considerations
Legal Background
The SBA regulations and guidance governing religious entities’ eligibility to participate in its loan
programs are undergirded by case law interpreting the two religion clauses of the First Amendment. As
mentioned above, the SBA’s regulations excluding primarily religious businesses from its loan programs
were grounded in constitutional concerns related to supporting religious activities. In general, the
Supreme Court has stated that the First Amendment’s Establishment Clause forbids “sponsorship,
financial support, and active involvement of the sovereign in religious activity.” Relying on the
Establishment Clause, the Court has invalidated government programs that directly provide money to
religious institutions but lack safeguards to ensure that the money is used only “for secular, neutral, and
nonideological purposes.” The Court has, at times, expressed special concern about using tax dollars to
support religious institutions, particularly if the government support is used “to proselytize or advance
any one, or to disparage any other, faith or belief.” By contrast, the Supreme Court has approved of
indirect aid programs, like some school voucher programs, if the “aid program is neutral with respect to
religion, and provides assistance directly to a broad class of citizens who, in turn, direct government aid to
religious schools wholly as a result of their own genuine and independent private choice.”
The First Amendment’s Free Exercise Clause, which protects the free exercise of religion, has influenced
recent changes in SBA policy. SBA’s April 3 guidance views its existing regulations as “impermissibly
exclud[ing] some religious entities,” implicitly invoking a Supreme Court case ruling that excluding
religious entities from public benefits programs can violate the Free Exercise Clause. In a 2017 decision,
Trinity Lutheran Church of Columbia v. Comer, the Court concluded that a state grant program excluding

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churches and other religious organizations from receiving grants to purchase rubber playground surfaces
violated the Free Exercise Clause. The Court held the program unconstitutional because it discriminated
against organizations based on their religious character. The Supreme Court acknowledged that in a prior
case, Locke v. Davey, it had ruled that a state could, without violating the Free Exercise Clause, prohibit
students from using publicly funded scholarships to pursue a degree in devotional theology. In Locke, the
Court recognized the state’s “historical and substantial state interest” in not using government funds to
support clergy. Trinity Lutheran distinguished Locke, saying the state in Locke had permissibly chosen to
deny a scholarship because of what the recipient “proposed to do—use the funds to prepare for the
ministry.” By contrast, in Trinity Lutheran, the Supreme Court held that the state was impermissibly
denying funds because of what the recipient “was”—a church. Some therefore interpreted the Trinity
Lutheran opinion as distinguishing between religious use and religious status: governments may deny the
use of public funds for religious activities, but may not deny funds on the basis of an applicant’s religious
identity or character.
Establishment Clause Considerations
Prior to the SBA guidance clarifying religious organizations’ eligibility for CARES Act aid, some argued
that any “direct government funding of inherently religious activities” through the new law would violate
the Establishment Clause. With SBA’s guidance clarifying that CARES Act loans “can be used to pay the
salaries of ministers and other staff engaged in the religious mission of institutions,” it seems likely that
questions relating to how the SBA’s guidance comports with the Establishment Clause will remain.
The PPP could be seen as an indirect aid program for Establishment Clause purposes and thus more likely
to be considered constitutional under existing Supreme Court jurisprudence. Under Section 1102, the SBA
guarantees loans made by third-party lenders, but the lenders decide whether to loan money to religious
organizations. Similarly, under the loan forgiveness program created by Section 1106, third-party lenders
review and decide on eligible organizations’ applications, and the SBA remits funds to the lenders.
Accordingly, under both provisions, the federal aid is directly provided to third parties—the lenders—
who themselves can decide to fund houses of worship or other religious organizations, similar to the
indirect aid programs that the Supreme Court has previously approved. Some have asserted that the
program is sufficiently neutral with respect to religion, given that it offers aid to a broad class of
organizations, religious and nonreligious, and appears to have a secular purpose of providing broad
economic aid, rather than supporting religion. However, prior Supreme Court cases on this issue have
involved the provision of indirect funding to religious schools, rather than churches as such. Historical
concerns about providing taxpayer funds to clergy could cause a court to scrutinize such a program more
closely. Ultimately, the Court has not considered a scheme identical to this one, and therefore, it may be
open to debate whether this program can be distinguished from other permissible indirect aid programs.
By contrast, the CARES Act’s EIDL provisions appear to authorize the SBA to provide money directly to
qualifying religious organizations, raising heightened concerns under the Court’s Establishment Clause
jurisprudence. The SBA expressly stated in the guidance document that it did not believe that the
Establishment Clause required it to put special restrictions on how religious organizations use CARES
Act funds. Accordingly, this program could be subject to challenge under cases invalidating programs that
directly provide unrestricted public funds to religious entities. And in particular, Locke suggests that
supporting clergy is a religious activity that implicates longstanding historical concerns about government
support for churches. Nonetheless, some have questioned whether these direct aid cases remain “good
law” in light of Trinity Lutheran. Further, more recent Supreme Court precedent suggests “neutral . . .
assistance programs that . . . offer aid directly to a broad class of individual recipients defined without
regard to religion” do not raise heightened Establishment Clause concerns.

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Free Exercise Clause Considerations
As mentioned, SBA’s April 3 guidance maintained that regulations excluding primarily religious
businesses from participating in SBA programs are unconstitutional. The agency stated that it would
amend these provisions and not enforce them in the interim. In August 2019, the Department of Justice’s
Office of Legal Counsel (OLC) expressed similar reservations about a federal statute that limits the
Department of Education’s ability to guarantee loans to historically black colleges and universities if the
loan would go “to an institution in which a substantial portion of its functions is subsumed in a religious
mission.” OLC, relying on Trinity Lutheran, concluded that this statute violated the Free Exercise Clause
by “discriminat[ing] based on the religious character of an institution.” The SBA’s statement that its own
regulations “impermissibly . . . . bar the participation of a class of potential recipients based solely on
their religious status” implies that the SBA has similar Trinity Lutheran-based concerns.
Excluding religious organizations from SBA programs solely because of their religious character would
likely raise free exercise concerns, particularly if the exclusion denies funding for activities that “have no
direct connection to” the organization’s religious activities. To the extent that existing regulations exclude
businesses that engage in religious activities regardless of whether the government aid would actually be
used to support those activities, they could be seen as impermissibly discriminating based on religious
status. On the other hand, the SBA apparently issued this rule excluding religious businesses because of
concerns about what they might do with federal aid. Locke and Trinity Lutheran suggest that the
government might still be able to prohibit federal funds from being used for religious activities. As noted
above, some have argued, based on Establishment Clause-related concerns, that CARES Act funds should
not be used to pay the salary of clergy or support facilities used for religious worship.
Even if the Free Exercise Clause forbids the SBA from excluding religious organizations from public aid
programs merely because of those organization’s status, it is unclear whether the government might
nonetheless be permitted—or required—to prohibit the use of those funds for certain religious activities.
The Supreme Court’s Establishment Clause jurisprudence is largely unsettled. The Court heard oral
arguments in one case involving the indirect provision of funds to religious schools in January—Espinoza
v. Montana Department of Revenue. Espinoza may provide further insight into whether a state may
exclude religious entities from aid programs without violating the Free Exercise Clause, but is unlikely to
provide much clarity on Establishment Clause restrictions on a government’s ability to include religious
entities in aid programs. Accordingly, it is difficult to say definitively whether the SBA’s interpretation of
the PPP and EIDL provisions of the CARES Act successfully avoid the dual concerns raised by the First
Amendment’s religion clauses. The Supreme Court has observed that there is “room for play in the joints”
between the Free Exercise and Establishment Clauses. If CARES Act programs support religious
activities, that aid may test how far the government may go to accommodate religious exercise without
violating the Establishment Clause.


Author Information

Valerie C. Brannon

Legislative Attorney

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