Thought Leadership

SBA Clarifies Application of Affiliation Rules to Payroll Protection Program

April 4, 2020 Advisory

Please note: Information in the following advisory was accurate upon its date of publication. However, given the rapidly changing nature of guidance from the Department of the Treasury and others, we recommend you visit the Treasury website and our COVID-19 Resource Center for the latest updates.

The Small Business Administration (SBA) has released a second Interim Final Rule regarding the Paycheck Protection Program (PPP) provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This new Interim Final Rule was issued late in the day on April 3, 2020, the opening day for lenders to accept PPP applications from eligible borrowers. This new Interim Final Rule supplements the initial PPP Interim Final Rule issued on April 2, 2020

The new Interim Final Rule provides clarification regarding the application of the SBA’s affiliation rules in determining borrower eligibility for a PPP loan. The new rule clarifies that in most cases a borrower will be considered together with its affiliates for purposes of counting the number of employees for determining PPP eligibility, and the SBA’s existing affiliation rules set forth in 12 CFR § 121.301 also apply to the PPP.

A business concern can be considered an affiliate with another business concern for purposes of counting the number of employees for PPP eligibility based on (i) ownership; (ii) stock options, convertible securities and agreements to merge; (iii) management; or (iv) identity of interest. In connection with the new Interim Final Rule, the SBA released a two-page overview of the application of the foregoing affiliation rules to the PPP.

The CARES Act waives application of the affiliation rules for the following borrowers:

  • Any business concern that is assigned a North American Industry Classification System (NAICS) code beginning with 72, with no more than 500 employees per physical location.
  • Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA.
  • Any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.

The new rule does not modify these existing affiliation waivers provided for in the CARES Act.

While the new rule could have been used as an opportunity for the SBA to provide a variety of additional affiliation-rule waivers (for example, for private equity portfolio companies), it provides only one additional exemption that only applies to faith-based organizations. Faith-based organizations are now exempt from the SBA’s affiliation rules for purposes of the PPP where the application of the affiliation rules would substantially burden those organizations’ religious exercise. As such, a faith-based organization will not be considered an affiliate of another organization if the relationship is based on a religious teaching or belief, or is part of the exercise of religion. 

The SBA released a Faith-Based Organizations FAQ  regarding the ability of faith-based organizations to participate in the SBA’s PPP and EIDL loan programs, which contains additional detail regarding the affiliate rule exemption. Additionally, SBA has clarified further that regardless of whether it has been informed of its tax-exempt status by the Internal Revenue Service (IRS), a church (including any temple, mosque, synagogue or other house of worship); integrated auxiliary of churches; and any convention or association of churches will qualify for PPP loans as long as such organization meets the requirements of Section 501(c)(3) of the Internal Revenue Code, and all other PPP requirements. SBA advises that “[s]uch organizations are not required to apply to the IRS to receive tax-exempt status.”

The new rule provides that faith-based organizations seeking PPP loans may rely on reasonable, good faith interpretations in determining whether this exemption applies, and SBA will not assess or require lenders to assess the reasonableness of the faith-based organization’s determination.

In addition to the release of the new Interim Final Rule and affiliation overview, the SBA has released a set of PPP Frequently Asked Questions (FAQs). At this point, only one question is answered in the FAQs, but it states that the document is intended to be updated regularly by SBA in consultation with the Department of the Treasury (the Treasury).

For additional information, please see our prior analysis of the SBA’s initial PPP Interim Final Rule, the Treasury’s initial guidance on the PPP, and the SBA lending program provisions of the CARES Act. Armstrong Teasdale attorneys are actively monitoring and providing updates regarding the impact of COVID-19, including the PPP and other provisions of the CARES Act. Should the Treasury or the SBA provide additional guidance, we will be sure to update you.

Contact Us
  • Worldwide
  • Boston, MA
  • Chicago, IL
  • Denver, CO
  • Dublin, Ireland
  • Edwardsville, IL
  • Jefferson City, MO
  • Kansas City, MO
  • Las Vegas, NV
  • London, England
  • Miami, FL
  • New York, NY
  • Orange County, CA
  • Philadelphia, PA
  • Princeton, NJ
  • Salt Lake City, UT
  • St. Louis, MO
  • Washington, D.C.
  • Wilmington, DE
Worldwide
abstract image of world map
Boston, MA
800 Boylston St.
30th Floor
Boston, MA 02199
Google Maps
Boston, Massachusetts
Chicago, IL
100 North Riverside Plaza
Suite 1500
Chicago, IL 60606-1520
Google Maps
Chicago, Illinois
Denver, CO
4643 S. Ulster St.
Suite 800
Denver, CO 80237
Google Maps
Denver, Colorado
Dublin, Ireland
Fitzwilliam Hall, Fitzwilliam Place
Dublin 2, Ireland
Google Maps
Edwardsville, IL
115 N. Second St.
Edwardsville, IL 62025
Google Maps
Edwardsville, Illinois
Jefferson City, MO
101 E. High St.
First Floor
Jefferson City, MO 65101
Google Maps
Jefferson City, Missouri
Kansas City, MO
2345 Grand Blvd.
Suite 1500
Kansas City, MO 64108
Google Maps
Kansas City, Missouri
Las Vegas, NV
7160 Rafael Rivera Way
Suite 320
Las Vegas, NV 89113
Google Maps
Las Vegas, Nevada
London, England
Royal College of Surgeons of England
38-43 Lincoln’s Inn Fields
London, WC2A 3PE
Google Maps
Miami, FL
355 Alhambra Circle
Suite 1200
Coral Gables, FL 33134
Google Maps
Photo of Miami, Florida
New York, NY
7 Times Square, 44th Floor
New York, NY 10036
Google Maps
New York City skyline
Orange County, CA
19800 MacArthur Boulevard
Suite 300
Irvine, CA 92612
Google Maps
Philadelphia, PA
2005 Market Street
29th Floor, One Commerce Square
Philadelphia, PA 19103
Google Maps
Philadelphia, Pennsylvania
Princeton, NJ
100 Overlook Center
Second Floor
Princeton, NJ 08540
Google Maps
Princeton, New Jersey
Salt Lake City, UT
222 South Main St.
Suite 1830
Salt Lake City, UT 84101
Google Maps
Salt Lake City, Utah
St. Louis, MO
7700 Forsyth Blvd.
Suite 1800
St. Louis, MO 63105
Google Maps
St. Louis, Missouri
Washington, D.C.
1717 Pennsylvania Avenue NW
Suite 400
Washington, DC 20006
Google Maps
Photo of Washington, D.C. with the Capitol in the foreground and Washington Monument in the background.
Wilmington, DE
1007 North Market Street
Wilmington, DE 19801
Google Maps
Wilmington, Delaware