Paycheck Protection Program Update: Many Religious Organizations Exempt from SBA Affiliation Rules (and Other Good News!)
Tax-Exempt Organizations Alert 04/07/20 Norah L. Jones, Jodi P. Patt, Corbin J. Morris, Jacob L. Zerkle, Zeljko Popovic
We recently shared a summary of certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) applicable to the nonprofit sector. As discussed in that publication (available here), certain “nonprofit organizations” described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), are among those eligible to receive forgivable emergency small business loans from the Small Business Administration (the “SBA”) as part of the Paycheck Protection Program (the “PPP”).
The CARES Act, however, left several questions unanswered for nonprofit organizations, including how the SBA affiliation rules would apply, whether religious organizations without an IRS determination letter would be eligible, and to what extent certain nondiscrimination requirements would apply.
SBA Affiliation Rules Generally
An applicant to the PPP generally must have 500 or fewer employees and must satisfy certain other eligibility requirements. For purposes of determining the number of employees, each applicant is considered together with its affiliates pursuant to the SBA’s existing affiliation rules. Those rules include several factors to determine whether an affiliate relationship exists, including common ownership, overlapping management, and identity of interest, among other factors indicating the presence of a control relationship (click here for a summary of the SBA affiliation rules applicable to the PPP). Because nonprofit organizations were not eligible to apply for SBA loans prior to the CARES Act, the SBA affiliation rules are not written in a way that clearly apply to nonprofit organizations creating some uncertainty about how they should be interpreted.
Specifically for religious organizations, it was unclear whether certain religious organizations would exceed the 500-employee limit and thus be ineligible for assistance under the PPP, such as a group of churches, a denomination, or a diocese.
Exemption for Religious Organizations
On April 3, 2020, the SBA issued an interim final rule (available here) to provide additional guidance regarding the application of the affiliation rules to faith-based organizations. Specifically, the interim final rule exempts otherwise qualified faith-based organizations from the SBA’s affiliation rules where the application of the affiliation rules would substantially burden those organizations’ religious exercise. The SBA acknowledged “the existence of faith-based organizations that would qualify for relief under the CARES Act but for their affiliation with other entities as an aspect of their religious practice.” Expanding on this point, the interim final rule provides that “[a] number of faith-based organizations understand their affiliation with other religious entities as a part of their exercise of religion, as a mandate given the ‘hierarchical or connectional’ structure of their church.” To avoid determining whether the application of the affiliation rules would substantially burden an applicant’s free exercise (and therefore violate the Religious Freedom Restoration Act), the SBA indicated that the affiliation rules do not apply to the relationship of any church, convention or association of churches, or other faith-based organization or entity to any other person, group, organization, or entity that is based on a sincere religious teaching or belief or otherwise constitutes a part of the exercise of religion. This includes any relationship to a parent or subsidiary and other applicable aspects of organizational structure or form.
A faith-based organization seeking assistance under the PPP 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. The SBA indicated that it will not assess, and will not require participating lenders to assess, the reasonableness of the faith-based organization’s determination. See #7 of the FAQ discussed below for information regarding how to claim the benefit of the affiliate exemption, including a description of the statement that should be attached to an organization’s loan application.
It is important to note that this exemption applies only to faith-based organizations. Other qualified nonprofit organizations remain subject to the SBA’s affiliation rules when seeking a loan under the PPP. More guidance is needed to explain how those rules will apply.
Other Good News for Religious Organizations
The SBA also issued a “Faith-Based Organizations FAQ” on April 3, 2020 (the “FAQ”) (available here), to address certain questions regarding the participation of faith-based organizations in the PPP and the Economic Injury Disaster Loan (“EIDL”) Program. The FAQ responds to eight questions, each of which is noted below. A brief summary of the SBA’s response is included below. Please see the linked FAQ for the SBA’s complete response to each question.
- Are faith-based organizations, including houses of worship, eligible to receive SBA loans under the PPP and EIDL programs? Yes. Faith-based organizations are eligible to receive SBA loans regardless of whether they provide secular social services.
- Are there any limitations on how faith-based organizations can use the PPP and EIDL loan money they receive? The same limitations apply to faith-based organizations that apply to all other recipients of these loans.
- How will churches qualify if they have not been informed of tax-exempt status by the IRS? Do organizations have to request and receive tax-exempt status or just meet the requirements of 501(c)(3) status to be eligible? “Churches” (including temples, mosques, synagogues, and other houses of worship), integrated auxiliaries of churches, and conventions or associations of churches qualify for PPP and EIDL loans as long as they meet the requirements of section 501(c)(3) of the Code, and all other PPP and/or EIDL requirements. Such organizations are not required to apply to the IRS to receive tax-exempt status.
- Will a faith-based organization be sacrificing its autonomy or its First Amendment or statutory rights if it requests and receives a loan? A faith-based organization that receives a loan will retain its independence, autonomy, right of expression, religious character, and authority over its governance, and no faith-based organization will be excluded from receiving funding because leadership with, membership in, or employment by that organization is limited to persons who share its religious faith and practice.
- What legal requirements will be imposed on a faith-based organization as a result of its receipt of this Federal financial assistance? Will those requirements cease to apply when the loan is either repaid in full or forgiven? Receipt of a loan through any SBA program constitutes Federal financial assistance and carries with it the application of certain nondiscrimination obligations, including the requirement to offer goods, services, and accommodations to the general public without discriminating on the basis of race, color, religion, sex, handicap, age, or national origin. The guidance clarifies that once the loan is paid or forgiven, all nondiscrimination obligations will no longer apply.
- Is a 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 (as explained in more detail by the interim final rule).
- Does a faith-based organization need to apply for the exemption to the affiliation rules or include any documentation of its religious beliefs or practices to fall within this affiliation exemption? No specific process or detailed filing is necessary to claim the benefit of this exemption. If an organization believes that it qualifies for the exemption to the affiliation rules, such organization should submit with its loan application a separate sheet stating as much. That sheet may be identified as addendum A, and no further listing of the other organizations with which the applicant is affiliated, or description of the relationship to those organizations, is required. An organization is not required to describe its religious beliefs. A sample addendum A is provided in the FAQ.
- How does an organization know where it fits in SBA’s size standards table? Should it use the table to determine whether it is a small business that is eligible to participate in the PPP program? Under the CARES Act, a non-profit organization qualifies as small, and is eligible for assistance, if (1) it has no more than 500 employees or (2) the NAICS code associated with its primary industry has a higher employee-based size standard. Some industries—including “religious organizations”—are currently listed in the size standards table with a monetary cap on annual receipts rather than an employee-based size standards cap.
Quarles & Brady continues to monitor COVID-19 developments closely, including analyzing other provisions of the CARES Act and monitoring guidance from federal, state, and local governments on the unfolding situation. We encourage you to check here or with your Quarles & Brady attorney for any future developments.
This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact your Quarles & Brady attorney or: