SBA Clarifies Lobbying and Economic Need Rules for Nonprofit PPP Borrowers

5 min

The Small Business Administration (SBA) released updated guidance on March 3, 2021 that answers two key Paycheck Protection Program (PPP) compliance questions for nonprofits. In its new guidance the SBA clarifies that the definition of "lobbying activities" set forth in the Lobbying Disclosure Act (LDA) should be used by Section 501(c)(6) organizations for purposes of determining their eligibility for PPP loans. The SBA also advised that nonprofits and others that are eligible to obtain a second-draw PPP loan will be deemed by SBA to have made the required economic uncertainty certification in good faith. Eligible nonprofits interested in applying for remaining funding should submit applications no later than March 31, 2021.

Section 501(c)(6) Applicants and the Definition of Lobbying

At the end of 2020, a new law expanded the availability of PPP loans to most Section 501(c)(6) organizations—including trade associations, professional societies, business leagues, and chambers of commerce—and to destination marketing organizations. Initially, only Section 501(c)(3) or (19) organizations were eligible. Under the new law, section 501(c)(6) organizations are eligible to apply for PPP loans as long as they:

  1. Are not engaged in significant lobbying activities, meaning:
    1. No more than 15% of revenues are received from lobbying activities;
    2. No more than 15% of total activities comprise lobbying activities; and
    3. Lobbying activity costs did not exceed $1 million during the most recent tax year ended prior to February 15, 2020.
  2. Have 300 or fewer employees;
  3. Are not a professional sports league, political campaign, or political activities organization; and
  4. Meet other program requirements.

The new law did not specify how "lobbying activities" would be defined or measured, leaving many 501(c)(6) organizations wondering how to count their lobbying activities for assessing PPP eligibility. SBA has now clarified in FAQ Number 57 that the definition of “lobbying activities” used in the LDA applies.

Previously, commentators speculated it would be reasonable to consider how federal tax law defines lobbying in determining eligibility. The LDA definition is significantly different from and far narrower than the tax code’s definition of lobbying, which may be good news for many 501(c)(6) organizations. Critically, the LDA does not require organizations to report state lobbying and grassroots lobbying expenses. Thus, many state-based and locally based 501(c)(6) organizations and national 501(c)(6) organizations that frequently conduct state, local, or grassroots lobbying have a better chance of qualifying for a PPP loan than they would have if a different definition had been applied.

The new guidance does not state which time period 501(c)(6) organizations should look to when counting lobbying activities for purposes of determining whether the 15% threshold has been met. The statute does provide that for purposes of determining whether an entity has expended more than $1 million in lobbying, an organization should look to the most recent tax year of the organization that ended prior to February 15, 2020. Many 501(c)(6) organizations have been applying this time frame for their 15% analyses in the absence of express guidance.

Somewhat confusingly, there is a different definition of “lobbying activities” for purposes of a separate restriction on spending PPP loan proceeds. SBA’s guidance in FAQ Number 58 reconfirms, as set by law, that PPP funds cannot be spent on lobbying activities under the LDA definition, or for lobbying expenses relating to state or local elections, influencing Congress, or influencing any state or local government or legislature. In all practicality, the dual definitions should have the effect of steering away PPP funds from for-profit and nonprofit lobbying groups that previously received millions in PPP funds, according to data released by the SBA.

Furthermore, the recent SBA guidance does not address the new law’s provision that prohibits certain entities from qualifying for a second-draw loan because of their lobbying activities. That prohibition applies to entities “primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents.” As it applies only to second-draw loans, 501(c)(6) organizations seeking their first PPP loan are not affected by this portion of the law.

Relaxed Economic Necessity Certification for Second-Draw Loans

The PPP second-draw loan is available to nonprofits that previously obtained a PPP loan and can demonstrate a 25% reduction in gross revenues during any quarter in 2020 as compared to the same quarter in 2019. As in the first draw, second-draw borrowers must certify in good faith that current economic uncertainty makes the loan request necessary to support their operations. FAQ Number 46 notes that because second-draw borrowers must demonstrate a 25% reduction in gross revenues, all second-draw borrowers will be deemed to have made the certification of need in good faith.

Essentially, SBA is taking the bright-line position that a quarter of declining revenues is sufficiently demonstrative of continuing economic need, without consideration of the amount of the loan request. This approach tracks a similar safe harbor for first-draw borrowers of any loan under $2 million, which similarly were deemed to have made the economic need certification in good faith. For nonprofits looking to obtain a second round of PPP funding, this should be welcome news about the SBA's expectations for substantiating the economic need certification.