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Faith-Based Organizations Provided an Exemption to Affiliation Rules Under the PPP

April 17, 2020

Paycheck

Paycheck Protection Program

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “Act”) to provide emergency assistance for individuals, families, and businesses affected by the coronavirus pandemic. The Act temporarily permits the Small Business Administration (“SBA”) to guarantee certain loans under a new program, the Paycheck Protection Program (“PPP”), to qualified organizations, including certain small business concerns and nonprofit organizations. A business concern or nonprofit organization is generally eligible for the PPP if it, combined with its affiliates, has 500 or fewer employees. Under SBA rules, entities may be considered affiliates based on factors such as stock ownership or overlapping management. Affiliation rules can present an obstacle to religious organizations seeking loans under the PPP as they can often have many affiliates that would otherwise cause them to exceed the 500 employee threshold. 

Faith-Based Organization Exemption

Pursuant to an Interim Final Rule promulgated by the SBA (the “Rule”), the current affiliation rules have been revised to exempt certain relationships of faith-based organizations from the SBA’s general principles of affiliation. According to the SBA, application of the affiliation rules without an exemption would place a substantial burden on religious organizations’ right to exercise religion. The revision provides that “[t]he relationship of a faith-based organization to another organization is not considered an affiliation with the other organization under this subpart if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.” 13 CFR § 121.103(b)(10)(i).

The Rule provides a broad definition of “faith-based organization,” stating that it includes, but is not limited to, any organization associated with a church or convention or association of churches as defined in the Internal Revenue Code. The Rule uses the Religious Freedom Restoration Act to define religious exercise broadly as “any exercise of religion, whether or not compelled by, or central to, a system of religious belief.” 42 USC § 2000cc-5(7)(A).

Finally, the Rule states that an entity applying for a faith-based exemption to the affiliation rules must use a “reasonable, good faith interpretation” to determine eligibility. The SBA will not assess, and will not require participating lenders to assess, the reasonableness of the faith-based organization’s determination.

Subsidiary entities must also meet the seemingly innocuous classification of an “organization,” as defined in Section 414(e)(3)(D) of the Internal Revenue Code of 1986, for the faith-based exemption to apply. While entity classifications under the Internal Revenue Code would ordinarily disregard single-member LLCs, thus eliminating their status as an “organization,” the Rule emphasizes that a faith-based exemption would cause the affiliation rules to not apply to any relationship with a parent that is part of the exercise of religion.

Entities should confirm with counsel to see if the faith-based organization exemption could provide a path to relief under the PPP.

[Note: Funding has been allocated and all indication is that the government will add more, but it is not certain when.] 

For more information, please contact Tony Frasca (734-214-7614 or afrasca@dykema.com), Kathrin Kudner (734-214-7697 or kkudner@dykema.com), Tom Vaughn (313-568-6524 or tvaughn@dykema.com), David Padalino (734-214-7616 or dpadalino@dykema.com), or your Dykema relationship attorney.

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