A few hours after adding question 40, the Small Business Administration added another two questions and answers to the frequently asked questions (FAQ) for the payroll protection program loans late on a Sunday evening.[1] These two questions deal with issues that arise for seasonal businesses and the certifications on the SBA Borrower Application Forms as well as whether hospitals exempt from tax under IRC §115 qualify to enter this program.

Seasonal Employers and the SBA Borrower Application Form

On April 27, 2020 the Small Business Administration issued an interim final rule that allowed seasonal businesses to use periods other than those specifically authorized in the law to compute their maximum loan amount. However, the SBA’s Borrower Application Form has language that caused some borrowers to be concerned that if they used the optional measuring period, they either could not sign the form that currently exists or, if they did, they might face liability or even prosecution for having provided false information to a financial institution for the purpose of obtaining credit.

The applicant is required to certify to the following statement on the Borrower Application Form:

I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.[2]

On page 3 the form contains the following specific instructions to the borrower:

For purposes of calculating “Average Monthly Payroll,” most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee. For seasonal businesses, the Applicant may elect to instead use average monthly payroll for the time period between February 15, 2019 and June 30, 2019, excluding costs over $100,000 on an annualized basis for each employee. For new businesses, average monthly payroll may be calculated using the time period from January 1, 2020 to February 29, 2020, excluding costs over $100,000 on an annualized basis for each employee.[3]

A seasonal business using the additional optional periods under the April 27, 2020 interim final rule would not be using the period required by the instructions to the Borrower Application Form.

Question 41 provides that the seasonal employer borrower is to ignore this instruction and refer to the interim final rule for purposes of completing the form. The question and answer reads:

41. Question: Can a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount under the interim final rule issued by Treasury on April 27, 2020, make all the required certifications on the Borrower Application Form?

Answer: Yes. The Borrower Application Form requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.” On April 27, 2020, Treasury issued an interim final rule allowing seasonal borrowers to use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. An applicant that is otherwise in compliance with applicable SBA requirements, and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page 3 of the Borrower Application Form for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s interim final rule on seasonal workers.

Hospitals Exempt from Tax Under IRC §115

Another concern addressed in the new questions is whether hospitals exempt from tax under IRC §115 can qualify for a PPP loan.

IRC §115 provides:

§ 115. Income of States, municipalities, etc.

Gross income does not include—

(1) income derived from any public utility or the exercise of any essential governmental function and accruing to a State or any political subdivision thereof, or the District of Columbia; or

(2) income accruing to the government of any possession of the United States, or any political subdivision thereof.

While certain non-profit organizations qualify for PPP loans, the law did not provide that such was the case for entities exempt from tax under §115. However, it is possible that a §115 organization might also qualify for an exemption under §501(c)(3), but the organization would not have made an application for that exemption since it was rendered unnecessary by IRC §115. The question was whether such a hospital could qualify for a PPP loan?

Question 42 provides relief for §115 hospitals that are also entities described in §501(c)(3), allowing the hospital to qualify for a PPP loan:

42. Question: Do nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code qualify as “nonprofit organizations” under section 1102 of the CARES Act?

Answer: Section 1102 of the CARES Act defines the term “nonprofit organization” as “an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and that is exempt from taxation under section 501(a) of such Code.” The Administrator, in consultation with the Secretary of the Treasury, understands that nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code are unique in that many such hospitals may meet the description set forth in section 501(c)(3) of the Internal Revenue Code to qualify for tax exemption under section 501(a), but have not sought to be recognized by the IRS as such because they are otherwise fully tax-exempt under a different provision of the Internal Revenue Code.

Accordingly, the Administrator will treat a nonprofit hospital exempt from taxation under section 115 of the Internal Revenue Code as meeting the definition of “nonprofit organization” under section 1102 of the CARES Act if the hospital reasonably determines, in a written record maintained by the hospital, that it is an organization described in section 501(c)(3) of the Internal Revenue Code and is therefore within a category of organization that is exempt from taxation under section 501(a). The hospital’s certification of eligibility on the Borrower Application Form cannot be made without this determination. This approach helps accomplish the statutory purpose of ensuring that a broad range of borrowers, including entities that are helping to lead the medical response to the ongoing pandemic, can benefit from the loans provided under the PPP.

This guidance is solely for purposes of qualification as a “nonprofit organization” under section 1102 of the CARES Act and related purposes of the CARES Act, and does not have any consequences for federal tax law purposes. Nonprofit hospitals should also review all other applicable eligibility criteria, including the Interim Final Rules on Promissory Notes, Authorizations, Affiliation, and Eligibility (April 28, 2020) regarding an important limitation on ownership by state or local governments. 85 FR 23450, 23451.

A related footnote discusses details of the hospital’s determination that it is an organization described in §501(c)(3):

This determination need not account for the ancillary conditions set forth in section 501(r) of the Internal Revenue Code and elsewhere associated with securing the tax exemption under that section. Section 501(r) states that a hospital organization shall not be treated as described in section 501(c)(3) unless it meets certain community health and other requirements. However, section 1102 of the CARES Act defines the term “nonprofit organization” solely by reference to section 501(c)(3), and section 501(r) does not amend section 501(c)(3). Therefore, for purposes of the PPP, the requirements of section 501(r) do not apply to the determination of whether an organization is “described in section 501(c)(3).”

[1] “Paycheck Protection Program Frequently Asked Questions (FAQs),” May 3, 2020 version (2nd), May 3, 2020, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf (retrieved May 4, 2020)

[2] SBA Form 2483, “Paycheck Protection Program Borrower Application Form,” U.S. Small Business Administration, April 2020, p. 2, https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf (retrieved May 4, 2020)

[3] SBA Form 2483, “Paycheck Protection Program Borrower Application Form,” U.S. Small Business Administration, April 2020, p. 3