Governmental Hospitals PPP Relief
Published May 6, 2020

Paycheck Protection Program: Expanded Relief for Governmental Hospitals

The Small Business Administration (SBA), in consultation with the Department of the Treasury, releases guidance on a regular basis to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Recent guidance provides clarification of PPP eligibility for nonprofit hospitals that are organized as an instrumentality of state or local government.

The Internal Revenue Code (IRC) exempts from taxation (IRC §115) income derived from a governmental function or a political subdivision of a federal, state, or local government. In some municipalities, this includes a hospital that is organized as an instrumentality of the state or local government. Such hospitals are exempt from federal income tax and are not required to file income tax returns with the Internal Revenue Service (IRS).

The IRC also exempts income derived from qualified charities from taxation (IRC §501(a)). Hospitals that provide charity care and meet other conditions can qualify under IRC §501(a) for tax-exempt status, but these hospitals are required to file an annual information return with the IRS and comply with other IRC §501(r) requirements for tax-exempt hospitals, such as performing a Community Health Needs Assessment.

The two provisions of the IRC are not mutually exclusive, and a governmental hospital can also qualify as a charitable hospital and gain exemption under both IRC §115 and IRC §501(a). However, due to the additional reporting requirements of a hospital exempt from tax under IRC §501(a), many governmental hospitals forgo gaining tax exempt status under IRC §501(a).

The CARES Act established the Paycheck Protection Program to benefit small employers facing economic hardship due to the COVID-19 pandemic. Language in the Act defines a non-profit entity as an entity exempt from tax under IRC §501(a). Taken strictly at face value, the interpretation of the CARES Act would disallow governmental hospitals exempt from tax pursuant to IRC §115, but not also recognized as exempt from taxation under IRC §501(a), from participation in the PPP.

Fortunately, guidance released by the SBA May 3, 2020, clarifies and expands the definition of a non-profit organization specifically as it relates to hospitals. The guidance states that a hospital that is otherwise eligible to receive a PPP loan will not be rendered ineligible due to ownership by a state or local government and related tax-exempt status under IRC §115. Such hospitals must meet two requirements:

  1. The hospital must determine and maintain a written record that it would be eligible for tax-exempt status under IRC §501(a) if the hospital had chosen to make application to the IRS for such determination. The hospital must make certification of eligibility on the Borrower Application Form that supports this determination.
  2. The hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.

Though the guidance includes governmental hospitals exempt from tax under IRC §115 in the same class as charities exempt from tax under IRC §501(a), this only applies for purposes of the temporary provisions of the CARES Act. Such hospitals are not beholden to the IRS reporting requirements of an IRC §501(a) hospital or the additional obligations of charitable hospitals under IRC §501(r).

This guidance provides relief to governmental hospitals that would otherwise be considered charity hospitals, if they were not governmental. This aligns with the intent of the CARES Act which is to help entities that are leading the response to COVID-19—hospitals on the forefront of the medical response to the pandemic.

If you have additional questions about hospitals and the Paycheck Protection Program or need further COVID-19 guidance, visit PYA’s COVID-19 hub, or contact a PYA executive below at (800) 270-9629.

 

Interested in Learning More?

Sign Up for Our Latest Thought Leadership!



    Select Your Subscriptions