The U.S. Small Business Administration (“SBA”) issued an Interim Final Rule on Affiliation on April 3, 2020, providing guidance on affiliation rules for purposes of determining the number of employees of an applicant to the Paycheck Protection Program (“PPP”). The PPP is a critical component of the CARES Act, offering potentially forgivable loans to eligible small businesses, nonprofits, sole proprietors, independent contractors and self-employed individuals to fund payroll and other expenses during the COVID-19 pandemic.
According to the Interim Final Rule on Affiliation and the summary Affiliation Rules Applicable to U.S. Small Business Administration Paycheck Protection Program guidance posted on the U.S. Treasury Department’s website, affiliation generally exists when one business concern or entity controls or has the power to control the other or when a third party (or parties) controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists. Affiliation under any of the circumstances described in one of the following four (4) tests below is sufficient to establish affiliation for a PPP applicant:
- Affiliation based on ownership.
- Affiliation arising under stock options, convertible securities and agreements to merge.
- Affiliation based on management.
- Affiliation based on identity of interest.
Please review each of these circumstances carefully in the guidance provided by the SBA, as affiliation with other business concerns or entities may negatively impact your loan application if the applicant or any owner of the applicant also owns any other other business or shares common management with any other business.
Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on affiliation. A borrower must certify on their application form that the borrower is eligible to receive a PPP loan, and that certification means that the borrower is a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632), meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable. SBA’s existing affiliation exclusions apply to the PPP, including, for example the exclusions under 13 CFR 121.103(b)(2).
Under the CARES Act, the affiliation rules described above are waived for:
- any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System code beginning with 72;
- any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and
- any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.
The CARES Act allows the “500-employee” rule to be applied on a per-physical location basis for the accommodation and food services sector (NAICS 72).
The SBA also issued guidance that indicates Faith-Based Organizations are also exempted from the SBA’s affiliation rules. Click here for more information on faith-based organizations.
For additional information on the Paycheck Protection Program and other Federal, state and local relief measures, please visit our COVID-19 Resource Center at https://www.tsacpa.com/coronavirus-covid-19-resource-center/ and refer to the “Small Business Loans” section featured under our CARES Act section of the website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at