How a Business with More than 500 Employees May Qualify for the SBA’s 7(a) Paycheck Protection Loan Program– April 08, 2020 by Dave Sobochan

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While the Paycheck Protection Program included in the CARES Act is geared toward loan forgiveness for small businesses, there are also alternative standards that may allow companies with more than 500 eligible employees to qualify.

The standards could apply even if a company doesn’t meet the revenue or payroll size standard based on a company’s NAICS code. However, a business must be a “small business concern” as defined below and must meet the alternative standards tests. This option does not apply to not-for-profits or veterans organizations.

How Does the SBA Define “Business Concern”?

Outside of the less-than-500-employee requirement, to be eligible for assistance from the SBA as a small business, an entity must be organized:

  • As a for-profit entity,
  • With a place of business located in the U.S., and
  • To operate primarily within the U.S. or make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.

Small agricultural cooperatives are the exception. A small agricultural cooperative is an association, corporate or otherwise, that adheres to the Agricultural Marketing Act and whose size does not exceed the size standard established by the SBA for other similar agricultural small business concerns.

A business concern may be formed as a(n):

  • Individual proprietorship,
  • Partnership,
  • Limited liability company,
  • Corporation,
  • Joint venture (if no more than 49% participation by foreign business entities),
  • Association, or
  • Trust or cooperative.

Two Tests to Qualify Under the Alternative Size Standards

In addition to the “business concern” rules above, an entity must meet the following two tests:

  1. As of March 27, 2020*, the maximum tangible net worth of the business cannot be more than $15 million, and
  2. The average net income after federal income taxes (excluding carryover losses) of the business for the two full fiscal years before the date of the application cannot be more than $5 million.

Affiliated businesses must aggregate tangible net worth and net income of the affiliated group.

*Although the SBA FAQ states the date of the net worth test is as of March 27, 2020, under the Code of Federal Regulations, the size status of an applicant for SBA financial assistance is determined as of the date the application for financial assistance is accepted for processing by the SBA. So there is a conflict between the Regulations and the FAQs, which should allow businesses to use their net worth as of the date of the application.

While tangible net worth is not defined in the code of federal regulations, it makes sense to use the total of partners’ capital accounts for partnerships, and the total of shareholders’ equity for corporations.
In determining your net income after taxes, follow the steps below:

  1. In computing net income after taxes, if the business is a flow through entity, multiply net income by the marginal state and local (if applicable) income tax rate that would have applied if the entity was taxable as a corporation. For example, in Ohio, corporations don’t pay state income tax but should factor in local income tax. The result will be net income after state and local taxes.
  2. Next multiply that result by the marginal federal income tax rate that would have applied if the applicant were a taxed as a corporation (21%). The result is your net income after taxes.
  3. You are not required to recalculate any other aspects of net income as a corporation (for instance, charitable deduction limitation as a C Corporation).
  4. NOLs are disregarded for this calculation.

It’s important to note that the method of accounting is also not defined in the code of federal regulations, so as a best practice calculate the numbers using both GAAP and Tax methods and then discuss your results with your tax advisor before finalizing.

Contact Dave Sobochan at, Adam Hill at or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.