On June 3, 2020, the Senate passed the Paycheck Protection Program Flexibility Act, H.R. 7010.  The bill received bipartisan support in the House with a 417-1 vote.  The bill attempts to ease restrictions on small businesses that seek loan forgiveness under the Paycheck Protection Program (“PPP”), a CARES Act initative.

The initial $350 billion in PPP funding dried up in 13 days.  It is now more than a month into the second round of funding and over $100 billion remains unallocated.  This is likely a result of businesses’ concerns over satisfying payroll requirements, confusion over the bill, and apprehension about what future guidance may hold and the liability that could result.  In fact, on May 22, the treasury issued new regulations that placed more burdens on small businesses.  This includes: (1) a requirement to maintain PPP documents for six years, (2) a warning that all loans may be reviewed at any time (previous Treasury FAQ’s provided a “safe harbor” for loans under $2 million, stating that they automatically complied with the necessity requirement), (3) an explanation that the loan forgiveness application review can take up to five months, and (4) a requirement that borrowers calculate the forgivable portion of the loan—which is not an easy task.    

While several bills aimed at relaxing PPP’s requirements have been introduced, the Paycheck Protection Program Flexibility Act showed the most promise.  (In a previous article I identified nine ways to improve the PPP.)  The bill was introduced by Republican Representative Chip Roy of Texas and Democratic Representative Dean Phillips of Minnesota and offers some needed flexibility, particularly after the Treasury’s May 22 interim rule.  

One of the more controversial aspects of the PPP is its 75-25 rule.  Under the PPP, a loan is eligible for full forgiveness so long as at least 75 percent of the funds are used for payroll expenses.  The remaining 25 percent may be used for rent, utilities, and interest on secured debt.  While this seemingly arbitrary requirement was well-intentioned and an attempt to quickly infuse money back into the economy, the pandemic’s effects are longer lasting than anticipated.  Due to state restrictions, many businesses are unable to operate at full capacity and the PPP allows for partial loan forgiveness for borrowers who do not meet the 75 percent threshold.  The House bill reduces the percentage that must be directed toward payroll costs to 60 percent.  Notably, the House bill does not appear to offer partial loan forgiveness for borrowers who fail to satisfy the 60 percent minimum.  

The current PPP ends on June 30, 2020, indicating that Congress hoped the crisis would be over in three months.  Recognizing that this is not the case, the House bill extends the June 30 deadline to apply for loans until December 31, 2020, should funds still be available.  The bill also extends the time borrowers have to use PPP funds to 24 weeks from eight weeks.  Borrowers who received a loan prior to the enactment may choose either an eight- or 24-week period.  For most, this is a much-needed change to the PPP as borrowers benefit from the flexibility to spread the loan over the full course of the crisis.  Otherwise, businesses may be forced to furlough and lay off employees again at the end of the loan period.  

The 2008 financial crisis demonstrated that most small businesses will not recover in two years; the House bill would extend the maturity of the loan from two to five years.  Moreover, under the CARES Act, PPP recipients are ineligible to defer payroll taxes.  As a result, many small businesses that hoped to receive PPP funds did not take advantage of the deferral program for fear of incurring IRS penalties if they ultimately received loan forgiveness.  The House bill amends the CARES Act and PPP to allow PPP participants to defer payroll taxes, thus providing small businesses with additional capital to survive.  

The bill also eases restrictions on loan forgiveness for borrowers who demonstrate that they could not rehire workers or reopen due to safety standards.  Currently, to be eligible for full forgiveness a borrower must rehire the same number of employees and maintain salary levels that it had pre-pandemic by June 30, 2020.  The House bill extends the safe harbor date until December 31, 2020, giving businesses an additional six months to rehire employees and restore payroll levels.    

Finally, the House bill ensures that borrowers are able to avoid making payments until forgiveness is determined.  The bill extends the deferral period and does not require repayment until the date on which the amount of loan forgiveness is remitted to the lender.  A borrower, therefore, may choose to wait to apply for loan forgiveness until they are more financially stable.  There is one caveat.  If a borrower fails to apply for forgiveness within ten months after the last day of the covered period, they must begin paying the principal, interest, and fees on the loan.  

The House bill offers a reprieve for small businesses.  Nevertheless, there remain several unanswered questions.  For example, the CARES Act states that the portion of a PPP loan that is forgiven is not considered taxable income.  Recently, the IRS issued guidance that otherwise deductible expenses are not deductible when covered with PPP forgiven funds.  Thus, leaving less after-tax capital for small businesses to put back into the economy, which is likely not what Congress intended when it was attempting to provide small businesses with additional sources of cash.  The bill, however, does not address the IRS’s interpretation denying deductions for otherwise deductible expenses.  

Moreover, the PPP’s focus on payroll expenses has small businesses essentially acting like unemployment offices; thus, discouraging many from applying.  Despite the fact that many businesses are not fully operational, the PPP requires borrowers to rehire employees—who may be receiving more in unemployment benefits, especially with the Federal Pandemic Unemployment Compensation’s (“FPUC”) additional $600 per week supplement—just to be eligible for the loan.  Although the House bill’s 60-40 rule helps alleviate this concern, borrowers should also take advantage of work shared benefits, which allow an employee to work on a reduced schedule and receive prorated unemployment benefits in addition to the FPUC $600 supplement.  

While the House bill responds to the continued economic uncertainty, several issues remain.  Most small businesses do not have a team of accountants and lawyers on staff and more should be done to simplify the onerous forgiveness process.  Although the demand has waned and funds remain, Congress should also consider implementing a flat processing fee for lenders, rather than a percentage, to ensure that small businesses continue to be prioritized over larger businesses.  

Ultimately, the bill should incentivize more small businesses to take advantage of the program as it allows borrowers to more efficiently use their PPP funds and relaxes the one-size-fits-all approach.  

For more on COVID-19, see our special coverage.

Samantha Block is a current law clerk for The Honorable Thomas C. Wheeler of the United States Court of Federal Claims. Samantha is a graduate of The George Washington Law School.  

Suggested citation: Samantha Block, Paycheck Protection Program May Add Some Needed Flexibility, JURIST – Professional Commentary, June 12, 2020, https://www.jurist.org/commentary/2020/06/samantha-block-paycheck-protection-program/.

This article was prepared for publication by Brianna Bell, a JURIST Staff Editor. Please direct any questions or comments to her at commentary@jurist.org