The SBA issued a new interim final regulation that is focused on the qualification of certain electric cooperatives under the PPP loan program.[1]

The preamble explains the entities that this IFR applies to:

Existing SBA regulations define a “business concern” as “a business entity organized for profit,” subject to certain limitations. 13 CFR 121.105(a)(1). Generally, electric cooperatives are organizations that are owned and controlled by members who receive services from the cooperative. Electric cooperatives periodically return any excess of net operating revenues over their cost of operations – generally referred to as “savings” – to their member-owners. In addition, electric cooperatives meeting the description of section 501(c)(12) of the Code may be exempt from federal income taxation under section 501(a) of the Code. To qualify for the exemption, an electric cooperative must receive at least 85 percent of its income each year from its members. The 85 percent member income test is computed annually. An electric cooperative may be exempt in one year, lose exemption in another year if it does not derive at least 85 percent of its income from members, and become exempt in a third year. Because of their potential tax exemption under section 501(c)(12) of the Code, electric cooperatives have faced uncertainty about their eligibility to receive PPP loans.

The SBA has decided that even though these organizations are tax exempt entities under a provision of §501 other than §501(c)(3), they should still qualify for participation in the PPP loan program:

1. Eligibility of Certain Electric Cooperatives

Are electric cooperatives that are exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code eligible for a PPP loan?

Yes. Electric cooperatives provide utility services and distribute savings to their member-owners. Accordingly, for purposes of the PPP, the Administrator, in consultation with the Secretary, has determined that an electric cooperative that is exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code will be considered to be “a business entity organized for profit” for purposes of 13 CFR 121.105(a)(1). As a result, such entities are eligible PPP borrowers, as long as other eligibility requirements are met. To be eligible, an electric cooperative must satisfy the employee-based size standard established in the CARES Act, SBA’s employee-based size standard corresponding to its primary industry, if higher, or both tests in SBA’s “alternative size standard.”1 The Administrator, in consultation with the Secretary, has determined that this treatment is appropriate to effectuate the purposes of the CARES Act to provide assistance to eligible PPP borrowers, including business concerns, affected by the COVID-19 emergency.

[1] RIN 3245-AH43, “Business Loan Program Temporary Changes; Paycheck Protection Program – Eligibility of Certain Electric Cooperatives,” Small Business Administration, May 14, 2020, https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Eligibility-of-Certain-Electric-Cooperatives.pdf (retrieved May 14, 2020)