Q&A #11 – Can my 501(c)(6) organization get in trouble for receiving a PPP loan?
Question: My 501(c)(6) trade association applied for and received a PPP loan with the encouragement of our bank. I am now reading that 501(c)(6) organizations are not eligible to receive PPP funds. I also read that the SBA will be focusing its audits on borrowers that received PPP loans in excess of $2,000,000, and ours was much less than that. Are we at risk for getting in trouble for having received this PPP loan?
Answer: Yes, there are risks for accepting a Paycheck Protection Program loan when the organization was not eligible to receive it. It is clear from the text of the CARES Act statute and from prior SBA guidance regarding eligibility for the “Section 7(a)” loan program (of which the PPP is one type) that the only nonprofit organizations eligible for PPP loans are 501(c)(3) and 501(c)(19) organizations. I do not see a credible argument that any other types of nonprofits (such as 501(c)(6) organizations) were ever eligible to receive a PPP loan.
It is true that the SBA has stated that borrowers (together with all affiliated entities) that have received less than $2 million in PPP loans will be deemed to have satisfied the requirement that economic uncertainty made the loan necessary, and that all loans in excess of $2 million will be subject to review (see Q&A #46 in the SBA’s often-updated PPP Frequently Asked Questions document). However, this particular safe harbor was specifically targeted to the question of “necessity,” and (as written) does not extend to threshold questions about eligibility.
Your PPP promissory note very likely included a series of “certifications,” a number of which directly speak to the borrower’s eligibility and qualification as either a “small business concern” or a tax-exempt 501(c)(3) or 501(c)(19) organization within the meaning of the relevant statutes and regulations. By signing the promissory note, the borrower is affirming the truth of these statements. Also, the promissory note very likely included an acknowledgment that knowingly making a false statement in one or more of these certifications can result in significant fines and potentially imprisonment.
Lastly, while there is risk for any 501(c)(6) organization (or other ineligible entity) that has received a PPP loan, it appears that the risk will be significantly increased if such organization applies to have the loan forgiven.
Planning Tip — 501(c)(6) organizations that received PPP funds should seriously consider returning the funds as soon as possible and gathering internal records that document communications with the bank and the date the organization became aware of the eligibility requirements. This may not remove all of the risk in this situation, but the optics are generally better when organizations are proactive in taking corrective action rather than waiting for the issue to be flagged externally.
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