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| 5 minutes read

New SBA Guidance on CARES Act PPP Loans: Affiliation Considerations

Under the Paycheck Protection Program (PPP) provisions of the CARES Act, generally a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or operates in a certain industry and meets the applicable Small Business Administration (SBA) employee-based size standard for that industry. 

In connection with eligibility standards, the SBA issued FAQs on April 6, 2020, which, while not law, stated that a business may be eligible for a PPP loan even if it has more than 500 employees, as long as the business meets either the SBA employee-based or revenue-based size standard corresponding to its primary industry.  A Table of Small Business Size Standards can be found here.


When determining the revenue-based size standard, a business will need to calculate its total receipts for its three most recently completed fiscal years and divide the total by three.  Receipts are defined to include all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship “gross income”) plus “cost of goods sold” as these terms are defined and reported on IRS tax return forms.  Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.  If you have not been in business for three years, you would apply total receipts for the period in business divided by the number of weeks in business and then multiplied by 52. 


Generally, the “affiliation rules” for SBA loans provide that a business qualifies as a small business and is eligible for an SBA loan, including a PPP loan, based on the total number of employees in all its domestic and foreign affiliates. The CARES Act relaxed these rules for certain businesses.  Specifically, the PPP provisions of the CARES Act waived the affiliation rules, but ONLY for (1) businesses assigned the North American Industry Classification System code beginning with 72 (accommodation and food services), (2) any business operating as a franchise and assigned a franchise identifier code by the SBA, and (3) any business that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act.  

Therefore, in most cases, a business will be considered together with its affiliates for purposes of determining eligibility for a PPP loan.  If the applicant combined with affiliates exceeds the 500 cap on employees, the applicant can look to employee-based or revenue-based size standards to see if a greater threshold is available to the applicant to still achieve eligibility.  To use the size standard, the size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher.

As noted above, while generally the SBA indicates that affiliate foreign entity employees are to be included, the PPP provisions of the CARES Act and all subsequent guidance to date has stated that only “employees whose principal place of residence is in the United States” will be included in the determination of maximum head count, payroll costs and payroll cost forgiveness.  We do note this may be a point of clarification in future guidance of the SBA, but as of today it is a reasonable position to exclude foreign entity employees in any calculations related to a PPP loan.  


Section 121.103(a)(8) of the Small Business Act provides that applicants in SBA’s Business Loan Programs, which would include the PPP, are subject to the affiliation rules contained in 13 CFR 121.301.  The SBA issued guidance (again not law) on April 3, 2020 related to the Paycheck Protection Program (PPP), providing only four affiliation tests under 13 CFR 121.301 to be considered for PPP loans: (1) based on ownership, (2) arising under stock options, convertible securities and agreements to merge; (3) based on management; and (4) based on identity of interest.

With respect to the first affiliation test, based on ownership, generally the regulations state that applicants and entities are “affiliated” when one owns or has the power to control more than 50% of the applicant’s voting equity or such entities are under common control by a third party.  Meaning if Company A owns Companies B, C and D (55%, 80% and 60% respectively), Company A has the power to control B, C and D. The companies are all affiliated.

As to affiliation through stock options, convertible securities and agreements to merge, the SBA considers these agreements to have a present effect on the power to control an applicant, which would establish affiliation through such existing grant of control.

Affiliation based on management arises if one or more officers, directors, managing members or general partiers of a business controls the Board of Directors and/or management of another entity.  For example, Company A and B would be affiliates if the controlling members of Company A’s board of directors occupy three out of five positions on Company B’s board of directors, because controlling members of Company A would also control the board of Company B. This would also result in all Companies controlled by Company A to be considered affiliates of company B and vice versa.  Affiliation based on management also arises where a single individual or entity controls the management of the applicant through a management agreement. 

Finally, the affiliation test related to identity of interest relates to business relationships between close relatives, defined as a spouse, a parent, a child or sibling, or the spouse of any such person. Affiliation will be found among close relatives with identical or substantially identical business or economic interests. However, under this affiliation test, applicants may rebut a presumption of affiliation with evidence showing that the interests that are deemed to be one are in fact separate.  


For additional consultation on consideration of eligibility and/or affiliation, we recommend you speak with legal counsel and work with your SBA approved lender to establish/confirm eligibility.  If you have already filed your PPP application based on the CARES Act provisions, which are legally binding, and any non-binding guidance issued prior to your filing, we note the SBA has issued a statement that borrowers and lenders may rely on the laws, rules and guidance available at the time of filing.  Only those borrowers that have submitted applications that have not yet been processed may revise their applications based on guidance or clarification issued later by the SBA.


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