The Small Business Administration (SBA) has issued additional guidance in frequently asked question number 42 clarifying the eligibility of public hospitals for loans under the Paycheck Protection Program (PPP).
Under Paycheck Protection Program of the CARES Act, “nonprofit organizations are considered to be eligible recipients if they are ‘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.’”
According to this definition, publicly owned hospitals would have been excluded from being eligible for the loans unless they were otherwise exempt under 501(c)(3). However, further guidance from the U.S. SBA may affect this.
We’ve developed resources to help hospitals navigate the compliance issues brought about by COVID-19.
The SBA’s Guidance on Publicly Owned Hospitals
The SBA Administrator, in consultation with the Secretary of the Treasury, indicated public hospitals exempt from taxation under section 115 of the Internal Revenue Code are unique. These types of 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 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.”
In other words, the SBA is providing some leeway when it comes to public hospitals by allowing them to be eligible recipients for these loans even without having 501(c)(3) status but instead relying on their exemption under Section 115. They do, however, need to meet the requirements of a 501(c)(3).
It is important to know the determination of meeting the requirements of 501(c)(3) does not need to take into consideration the requirements under 501(r) of the Internal Revenue Code associated with securing tax exemption under 501(c)(3). Section 1102 of the CARES Act defines the term “nonprofit organization” solely by reference to section 501(c)(3). As such, for purposes of the PPP, the requirements of 501(r) do not apply in the determination of whether a hospital is “described in section 501(c)(3).”
In addition to meeting the requirements of 501(c)(3), the Treasury also indicated in an interim final rule a hospital otherwise eligible to receive a loan shall not be rendered ineligible due to ownership by a state or local government. Specifically, the hospital must receive less than 50% of its funding from state or local government sources, exclusive of Medicaid.
What Publicly Owned Hospitals Can Do
We recommend publicly owned hospitals consider consulting with legal counsel to document how the hospital meets the requirement of being described in section 501(c)(3). It will be critical to maintain documentation in organizational files to support this determination prior to applying for a PPP loan.
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