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SBA Clarifies that Houses of Worship and Other Faith-Based Organizations Are Eligible for Loan Programs and May Be Eligible for Relief Under the SBA Affiliation Rules

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| Legal Advisory

The Small Business Administration (SBA) has issued supplemental guidance to clarify that faith-based organizations, including houses of worship, are eligible to receive SBA loans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL).

Separate guidance, issued in the form of a supplement to the SBA’s April 2, 2020 Interim Final Rule, explains the legal basis for exempting faith-based organizations from the SBA affiliation rules that would otherwise require affiliated organizations to aggregate their employees for purposes of the 500-employee limit that determines loan eligibility for most potential borrowers.

The key takeaways from the above-mentioned guidance are as follows:

1. Faith-based organizations, including houses of worship, are eligible to receive SBA loans under the PPP and EIDL programs. There had been some confusion regarding whether or not faith-based organizations, which typically are 501(c)(3) nonprofit organizations, are eligible to participate in the PPP and EIDL programs. The confusion stemmed from SBA regulations (13 C.F.R. § 120.110(k) and 123.301(g)) stating in part that “businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting” are not eligible to participate in the SBA loan programs. The SBA made clear on April 3 that the CARES Act provisions allowing section 501(c)(3) organizations to participate in the loan programs override these regulations, that the SBA will decline to enforce them, and that the SBA intends to propose amendments to conform these regulations to its understanding of current First Amendment principles.

2. There are no additional limitations to the use of funds for faith-based organizations. The SBA guidance clarifies that faith-based organizations are subject to the same rules regarding the use of funds as other potential borrowers. In particular, the SBA has clarified that funds do not need to be limited to expenditures for secular purposes and that PPP funds may be used to compensate members of the clergy and other staff engaged in the religious mission of these institutions.

3. The special rules under the Internal Revenue Code that do not require houses of worship and other faith-based organizations to apply for and receive a 501(c)(3) determination letter do not prevent them from receiving PPP and EIDL funds. Houses of worship (including churches, temples, synagogues, and mosques), “integrated auxiliaries thereof” (as described below), and conventions or associations of houses of worship are eligible loan applicants as long as they meet the requirements of section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). Religious orders are examples of integrated auxiliaries and umbrella organizations of religious denominations are examples of conventions or associations of houses of worship.

Unlike other 501(c)(3) organizations, the faith-based organizations outlined above are not required to apply for and receive a so-called “determination letter” from the Internal Revenue Service in order to be exempt from federal income tax as an organization described in section 501(c)(3) of the Code. They simply need to be described in section 501(c)(3) of the Code. While documenting the section 501(c)(3) status of these organizations will not be as straightforward as for 501(c)(3) organizations that can produce an IRS determination letter, it will be helpful for potential applicants to provide governance or other documents showing that the organization is organized and operated for religious purposes and thus described in section 501(c)(3) of the Code.

4. Certain federal nondiscrimination laws will apply for the duration of the loan. For so long as a borrower is using funds under the loan programs, the borrower may not discriminate on the basis of race, color, religion, sex, handicap, age, or national origin with regard to goods, services, or accommodations offered. But, the SBA guidance is clear that these rules do not apply to ministry activities within an organization’s own faith community. More detail on these rules is provided in the supplemental guidance.

5. Certain religious organizations are exempt from the SBA’s affiliation rules. When determining whether a potential borrower is eligible to receive funds based upon number of employees, the SBA generally applies affiliation rules to determine whether organizations must aggregate their employee counts. (See 13 C.F.R. 121.301.) We describe the affiliation rules, and certain exceptions to those rules, in more detail in our advisory Can Portfolio Companies of Private Equity and Venture Capital Funds Take Advantage of COVID-Related Stimulus Programs? Generally speaking, the concept of “affiliate” or “affiliation” is based upon common ownership (not applicable in the nonprofit context), common management and identity of interest. In its supplement to the Interim Final Rule, the SBA states that the affiliation rules do NOT apply if the connection between the applicant religious organization and another entity that would constitute an affiliation is based on a religious teaching or belief or is otherwise a part of the exercise of religion. Examples of faith-based affiliation include affiliation due to beliefs about church authority or internal constitution or because the legal, financial, or other structural relationships between an applicant organization and other organizations reflect an expression of such beliefs. Note, however, this exemption from the SBA’s affiliation rules does not apply where the affiliation is in place for administrative convenience.

SBA guidance provides that the exemption from the affiliation rules is determined on a good faith basis by the applicant. The SBA will not assess and will not permit lenders to assess the reasonableness of such a good-faith determination. The only documentation required for this purpose is a separate statement by the applicant, for which the SBA has provided sample language:

The Applicant claims an exemption from all SBA affiliation rules applicable to Paycheck Protection Program loan eligibility because the Applicant has made a reasonable, good faith determination that the Applicant qualifies for a religious exemption under 13 C.F.R. 121.103(b)(10) which say that “the relationship of a faith-based organization to another organization is not considered an affiliation with the other organization … if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.

This advisory was prepared by Melissa Sampson McMorrow, chair of Nutter’s Tax Department and co-chair of the Nonprofit and Social Impact practice group. For more information, please contact Melissa or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.  

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