SBA Issues New Rule on PPP Eligibility of Telephone Cooperatives

On June 5, 2020, the U.S. Small Business Administration (“SBA”) posted a sixteenth Interim Final Rule on Eligibility of Certain Telephone Cooperatives. This Interim Final Rule supplements the previously posted interim final rules by addressing the eligibility of mutual or cooperative telephone companies that are described in section 501(c)(12) of the Internal Revenue Code (telephone cooperatives) as Paycheck Protection Program (“PPP”) borrowers. The immediate effective date of this Interim Final Rule is critical to meet lenders’ and borrowers’ need for clarity concerning program requirements as rapidly as possible, because the last day eligible borrowers can apply for and receive a loan is June 30, 2020.

Existing SBA regulations define a “business concern” as “a business entity organized for profit,” subject to certain limitations [13 CFR 121.105(a)(1)]. Generally, telephone cooperatives are organizations that are owned and controlled by members who receive telecommunications services from the cooperative. Telephone cooperatives periodically return any excess of net operating revenues over their cost of operations – such as through “capital credits” – to their member-owners. In addition, telephone cooperatives meeting the description of section 501(c)(12) of the Code may be exempt from federal income taxation under section 501(a) of the Code. To qualify for the exemption, a telephone cooperative must receive at least 85% of its income each year from its members. The 85% member income test is computed annually. A telephone cooperative may be exempt in one year, lose exemption in another year if it does not derive at least 85% of its income from members, and become exempt in a third year. Because of their potential tax exemption under section 501(c)(12) of the Code, telephone cooperatives have faced uncertainty about their eligibility to receive PPP loans.

Section 1. Accordingly, for purposes of the PPP, a telephone cooperative that is exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code will be considered to be “a business entity organized for profit” for purposes of 13 CFR 121.105(a)(1). As a result, such entities are eligible PPP borrowers, as long as other eligibility requirements are met. To be eligible, a telephone cooperative must satisfy the employee-based size standard established in the CARES Act, SBA’s employee-based size standard corresponding to its primary industry, if higher, or both tests in SBA’s “alternative size standard.”

Under the alternative size standard, a business concern, including a telephone cooperative, can qualify for the PPP as a small business concern if, as of March 27, 2020: (1) the maximum tangible net worth of the business was not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. For a telephone cooperative that does not have net income, the cooperative’s capital credits distributed to its owner-members will be considered its net income.