On May 3, 2020, the SBA released additional questions and answers, which can be found at the following link: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

Of particular note is Q&A #42, which relates to hospitals that are exempt from taxation under IRC Section 115, which includes hospital and healthcare authorities (and other similar governmental instrumentalities) without Section 501(c)(3) status:

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. [Emphasis Added]

It is also important to note that, within footnote 16 (related to the bolded text above), SBA specifically confirms that a qualifying hospital is not required to meet the requirements under IRC Section 501(r) to be eligible for a PPP loan.

In making the written determination, there are two main considerations to be addressed:

  1. The Authority should not have powers so strong as to qualify as a government. The three (3) sovereign powers generally considered to set apart a government are: the power to tax, the power to police and the power of eminent domain. Each Authority should review its respective powers to determine if any would rise to a level of deeming it a government.
  2. The Authority should also be able to demonstrate it meets the community benefit standard under IRS Revenue Ruling 69-545 (https://www.irs.gov/pub/irs-tege/rr69-545.pdf). General considerations for this test are: the composition of the governing board (i.e., significant community involvement), openness of admission to the medical staff for qualified physicians, existence of a full-time emergency room that is open to everyone regardless of their ability to pay, acceptance of private and third-party payors (including Medicaid and Medicare) for non-emergency services, reinvestment of any excess revenue over expenses into the facility, and the absence of private inurement transactions or impermissible private benefit. Each Authority should review its policies and procedures to ensure it meets the community benefit standard.

The addition of Q&A #42 appears to be a very favorable release for the hospital and healthcare authority community. However, the documentation must be complete to meet the requirements of the lender and the SBA. It is important to note the remarks made by Treasury Secretary Steven Mnuchin on April 28, 2020, that all PPP loans in excess of $2 million will receive a full review by SBA, prior to the loan forgiveness (also addressed in Q&A #39).

For more information, please contact our Albany office at (229) 883-7878 or our Atlanta office at (404) 220-8494.

Access all Client Alerts by clicking here.