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Nonprofits unsure about small-business loan access as clock ticks

National nonprofits are concerned that local branches could run afoul of SBA rules designed to weed out larger organizations from qualifying

A Fit & Well Seniors exercise class hosted by the YMCA of Metropolitan Washington, pre-pandemic.
A Fit & Well Seniors exercise class hosted by the YMCA of Metropolitan Washington, pre-pandemic. (Tom Williams/CQ Roll Call file photo)

The door to forgivable small-business loans swung open to a broad range of nonprofits as part of the $1.9 trillion coronavirus relief package that became law earlier this month. But larger tax-exempt organizations still face substantial uncertainty about whether and when they’ll be able to tap into the funds.

Lawmakers bought nonprofits some time to figure things out last week, clearing for President Joe Biden’s signature legislation to extend the Paycheck Protection Program application deadline by two months to May 31.

That will give tax-exempt groups and businesses access to what Senate Small Business Chairman Benjamin L. Cardin, D-Md., estimated will be roughly $50 billion left in the program after this month, out of nearly $814 billion appropriated overall.

But national nonprofits like Boys & Girls Clubs of America and YMCA of the USA are concerned that without clear guidelines from the Small Business Administration, local branches could run afoul of “affiliation rules” designed to weed out larger organizations from qualifying.

The SBA relies on a complicated test to determine whether potential aid recipients are owned or controlled by a larger group or third party; even the power to exert control over affiliates without exercising it can result in an adverse ruling. Making matters more complicated, the SBA essentially had to apply eligibility tests designed for small businesses to nonprofits that the administration typically doesn’t focus on.

The law creating the Paycheck Protection Program made nonprofits with a charitable designation under Section 501(c)(3) of the tax code and veterans organizations eligible as long as each recipient didn’t have more than 500 employees.

Affiliation rule waivers were added for restaurant and hotel chains, independent franchises and firms backed by small-business investment companies, as long as each location didn’t go over the 500-worker cap. The SBA clarified that churches and other religious groups without a 501(c)(3) ruling could also benefit, and affiliation rules were waived for them as well.

The December omnibus spending law added local chambers of commerce, business leagues and others with a Section 501(c)(6) designation as well as state and local tourism promotion bureaus. Beneficiaries under these categories were limited to 300 employees each, and restrictions on lobbying activities and expenditures were also included.

The aid package that Biden signed earlier this month liberalized the rules for most nonprofits, stipulating that the employee limits would apply to each “physical location.” It also opened the PPP door to other nonprofit categories, including labor unions, country clubs, fraternal societies and more. For these groups, access to the program is limited to applicants with no more than 300 employees per location.

Previously, they could qualify for aid only if they had a separate 501(c)(3) arm, such as union apprenticeship funds or charities run by golf clubs, for example. This expanded group of nonprofits isn’t eligible if they engage in substantial lobbying activities or paid more than $1 million to lobby in 2019, so some of the biggest labor unions would likely be excluded, for instance.

It’s also unclear exactly how the affiliation rules would affect unions, since many union locals are considered independent of their broader national organization but can sometimes have multiple physical locations of their own. One expert who didn’t want to be named said the affiliation rules “haven’t been tested yet” when it comes to unions.

FiscalNote, the parent company of CQ Roll Call, has received a loan under the Paycheck Protection Program.

‘A lot of heavy lifting’

Including tax-exempt tribal organizations, the SBA approved around $36 billion in forgivable loans to nonprofits through February, dispensing aid to child care centers, hospices, churches, museums, operas, schools, research centers and many others, according to agency data.

Still, for bigger nonprofits, lifting the overall 500-employee cap makes a difference. While some 600 local YMCAs received loans last year, the largest 200 or so were ineligible because they were above the limit.

“Big-city Y’s that were actually doing a lot of heavy lifting with emergency services weren’t eligible for funding, which was a huge problem,” YMCA spokesman Ryan O’Malley said. He explained that YMCAs lost about $3 billion last year when memberships were canceled and other revenue dried up, yet still provided community services during this period.

Under the new law, the YMCA of Metro Chicago, for example, can now qualify. The metro Chicago association has more than 500 employees among its 14 branches, so it was ineligible last year. But it should qualify now because none of its branches has more than 500 employees.

However, there’s still a concern among nonprofits that the rules are unclear. A March 17 letter to SBA Administrator Isabel Guzman from more than two dozen groups said that agency reviewers “routinely misapply affiliation restrictions to certain nonprofit organizations across the country, placing increased burdens and demands on nonprofit applicants and delaying loan application processing.”

The groups added that such “incorrect assumptions have created additional long and stressful processes for legitimately eligible organizations,” including YMCAs and Boys & Girls Clubs, among others. The nonprofits suggested to Guzman that the agency stipulate that if an organization has its own employer identification number, files its own IRS Form 990 for tax-exempt groups and has its own bylaws, it should automatically be eligible.

The groups raised other potential hurdles, such as an unclear definition of “physical location” and how workers who report to multiple locations or health aides who work out of clients’ homes should be treated.

The initial House-passed aid package earlier this month would have simply waived the affiliation rules for nonprofits as long as they would otherwise qualify for a loan. But Senate Small Business ranking member Rand Paul, R-Ky., sought a parliamentary ruling that the affiliation waiver would violate that chamber’s “Byrd rule,” which bars extraneous provisions.

Senate Democrats removed that House provision before the parliamentarian could issue an opinion. The Congressional Budget Office evidently believed the savings would be substantial; of $7.25 billion of new PPP appropriations in the aid bill, the CBO cut its estimate of how much would be spent almost in half, to $3.8 billion, in the Senate version.

Democrats said that despite the new CBO estimate, they weren’t aware of any big nonprofits that would be left out of the program, and they proceeded to funnel the savings into a bigger fund for restaurants and bars in the final aid package.

Planned Parenthood fracas

Paul and other Republicans said the affiliation waiver in the House bill would have made Planned Parenthood clinics eligible for loans. But Sam Lau, a spokesman for Planned Parenthood Federation of America, said the House provision wasn’t aimed at their organization, adding that Planned Parenthood affiliates “are eligible for PPP loans with or without the waiver.”

Last year, after GOP pressure, the Trump administration’s SBA informed some 38 Planned Parenthood affiliates that were approved for more than $80 million in loans that they should have been barred under the affiliation rules. But Planned Parenthood disputed that claim, and while some local offices returned the money, many others kept it.

In a May 19, 2020, letter to Planned Parenthood of Delaware, for instance, SBA officials wrote that the Planned Parenthood Federation of America clearly exercises control over its affiliates. They cited mandates and accreditation standards for each organization in the federation’s bylaws, as well as the fact that the central office lists all its local affiliates on its website.

Planned Parenthood and Democratic lawmakers shot back that each affiliate was an independent 501(c)(3) group and that such attacks were politically motivated, citing other nonprofits with similar structures that received PPP loans without being questioned.

Under the Biden administration, Republicans have expressed concern that the SBA will simply look the other way when it comes to Planned Parenthood. That led Sen. Marco Rubio, R-Fla., to try to amend the PPP extension bill last week with restrictions on Guzman’s flexibility in prioritizing loan recipients.

“What she wants to go do is probably give money to Planned Parenthood and other groups like that that were never intended to be beneficiaries — so large organizations with millions of dollars,” Rubio said. His amendment was rejected, 48-52.

Caitlin Reilly and Greg Tourial contributed to this report.

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