Tax Services • Published 4/06/2020 CARES Act: SBA Provides Guidance on Affiliation Rules for Paycheck Protection Program

On March 27, 2020, Congress passed, and President Trump enacted, the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide emergency health care and economic assistance during the COVID-19 global pandemic. One of the main provisions created by the CARES Act is an extension of lending by the Small Business Administration (SBA) known as the Paycheck Protection Program (PPP). On Friday, April 3^rd, the SBA issued an interim final rule concerning the application of existing SBA affiliation rules to the PPP.

What Is Affiliation?

In general, the SBA loan program affiliation rules require that certain related business entities be viewed together as one applicant when determining whether they constitute a “small business” eligible for SBA funding. These affiliation rules generally require a borrower to be considered together with its affiliates when there is common stock ownership, management, or an identity of interest (e.g., based on familial relationships) between the borrower and its affiliates. In addition, affiliation can exist based on the existence of certain stock options, convertible securities, and agreements to merge. While the CARES Act specifically exempted certain entities in the accommodation and food services sector from affiliation rules, further clarification was needed on the affiliation rules in light of the expansion of the PPP to include 501(c)(3) entities. In its second interim final rule, the SBA addressed the application of affiliation rules under the CARES Act.

Interim Final Rule

On April 2, 2020, the Treasury issued an interim final rule on the PPP. Historically, non-profit organizations or organizations that principally engaged in teaching, counseling, or indoctrinating religious beliefs, whether in secular or religious setting were not eligible for SBA funding. The CARES Act expanded eligibility for the PPP to 501(c)(3) entities and this interim final rule clarified that churches, conventions or associations of churches, or other faith-based organizations are eligible for the federal stimulus package. 

In addition to clarifying that faith-based organizations could qualify for the PPP, the interim final rule also provided guidance with respect to how general SBA affiliation rules affect faith-based organizations. Specifically, this rule creates a faith-based exemption from an affiliation rule when the affiliation would substantially burden the organizations’ religious exercise. In creating this exemption, the SBA noted that faith-based organizations “understand their affiliation with other religious entities as part of their exercise of religion…” As a result, imposing affiliation rules upon such organizations would impose a substantial burden on religious exercise that is impermissible.

Finally, the guidance notes that no specific process or filing is necessary to claim the benefit of this exemption, though the guidance notes that they can indicate that it qualifies for the exemption in an addendum to its application. Furthermore, a faith-based organization may rely on a reasonable, good faith interpretation in determining whether its relationship to any other person, group, organization, or entity is exempt from the affiliation rules under this provision. If they do so, the SBA will not assess, and will not require participating lenders to assess, the reasonableness of the faith-based organization's determination. In addition to this interim rule, the SBA also provided an FAQ for faith-based organizations, available here.

What Was Left Out?

Many in the business community had been awaiting the SBA’s guidance on affiliation rules as applied to the PPP in light of the unprecedented COVID-19 global pandemic. In fact, some business commentators hoped for clarification of how it applied to certain common situations outside of the non-profit entity space. Specifically, many business interests hoped it would provide guidance on how to apply the rules in private equity settings. Many entities who operate in the private equity space own majority holdings in a variety of businesses, though those businesses are often not commonly managed at the operational level. Absent an exception, however, it is likely that all such entities that are majority-owned by a private equity interest will be deemed affiliated. Based on the number of employees of the overall group, many businesses that could otherwise qualify for PPP relief may not be eligible based on their ownership by private equity interests.

P&N continues to monitor changes and provide updates on the CARES Act. Please contact us if you have questions about how this may impact your organization.