Lawmakers are looking to make small business loans more palatable for companies facing economic hardship from the coronavirus pandemic, but changing the terms this late in the game raises more questions than it answers.
For one thing, the nation isn’t out of the woods yet on the virus, and even as businesses start to reopen, consumers might be wary of venturing out and revenue could remain stagnant. And if the economy does open back up this summer, some medical professionals are predicting an even harsher second wave in the fall.
Congress is doing what it can to help businesses that received Paycheck Protection Program (PPP) loans by reevaluating the program and making some changes after a rocky start.
Under a bill recently passed by the House (H.R. 7010), loans received after its enactment could be subject to a covered period of up to 24 weeks for determining employee reductions and how the proceeds are spent. For loans received before the statute’s enactment, businesses would have the option to use either the eight-week forgiveness period from the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) with a slightly extended alternative covered period from the rules, or the new 24-week period.
“My biggest concern is that it’s binary,” said Ryan Udell of White and Williams LLP. “It assumes your business will ramp up; it’s optimistic, but it’s not necessarily realistic.”
If a business were subject to the 24-week covered period, it could be in trouble if it spends the proceeds over a 10-week period in the summer but a second wave of the coronavirus hits in the fall and businesses again have to shut down.
The House bill, the Paycheck Protection Program Flexibility Act of 2020, would provide flexibility in that context: If employee head count is reduced because of guidelines put out by governmental authorities, companies wouldn't be penalized for failing to maintain those counts, Udell pointed out. The bill also appears to add a relief measure promulgated by the Small Business Administration and Treasury that says if a company is unable to rehire an individual, that won’t affect its loan forgiveness.
Some practitioners say it would be helpful for the covered period to last up to 24 weeks, but with the option to make it last only as long as the proceeds are spent. Others wonder what would happen to that alternative covered period if the House bill became law.
The SBA and Treasury created an alternative covered period for borrowers with a biweekly or more frequent payroll cycle to use a favorable time frame to spend the loan proceeds. Under the alternative covered period, the time frame to spend the funds begins on the first day of the first payroll cycle during the covered period and then lasts eight weeks.
But the House bill doesn’t mention that alternative covered period, and David A. Surbeck of Holland & Knight LLP said it’s unclear whether that additional period would remain available given the new 24-week covered period.
Under the House bill, the loan terms would be extended, so at a minimum, loans would have a five-year maturity for any unforgiven balances after an application for forgiveness, Surbeck pointed out. Employers who have received PPP loans already agreed to two-year maturity terms, so it will be interesting to see if employers who run into forgiveness issues would be able to renegotiate a five-year loan term with banks, Surbeck added.
The PPP was one of the options businesses could take advantage of under the CARES Act during the pandemic. Another is the employee retention credit, which provides a fully refundable credit against the employer’s portion of payroll taxes. However, only $10,000 in wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.
An employer must forgo that credit if it wants to apply for a PPP loan, and jump through several other hoops to qualify for the loan. But if an employer qualifies and a specific portion of the proceeds is used to fund payroll costs over the eight-week period after receiving the loan, it will be forgiven tax free.
So far, the PPP has been plagued with inconsistent guidance. Guidance on the necessary certification businesses need to receive the loans has frequently changed at the last minute, and new rules seem to create more ambiguities in the program. One of the major pieces of guidance from the SBA and Treasury is how the proceeds must be spent to qualify for forgiveness.
According to the current guidance, at least 75 percent of loan proceeds must be spent on payroll costs to be forgivable on a tax-free basis. Under the House bill, that threshold would be changed to allow up to 40 percent of the loan proceeds to be spent on other items such as rent and utilities.
Practitioners have pointed out that language in the bill appeared to create a cliff effect whereby if only 59 percent of the proceeds were spent on payroll costs, forgiveness would be completely blown. Sen. Marco Rubio, R-Fla., confirmed June 1 that provision in the bill, adding that language would need to be changed to avoid such an effect.
But some practitioners think the 60 percent rule is fine the way it is.
“If they really do give borrowers a full 24 weeks to use the funds and not something like eight weeks inside of the 24 weeks, businesses should be required to use 60 percent of the funds on payroll costs,” said Adam Markowitz of Howard L Markowitz PA CPA. “Heck, I'd go so far as to say I believe they should have to use 100 percent of the funds on payroll costs.”
Markowitz said the PPP was designed specifically to take people off unemployment and keep them employed, and if the program remains dedicated to that, there's no reason that 10 weeks of payroll costs can't be spent in a 24-week period.
What We Have Now
Erica Horn of Dean Dorton Allen Ford PLLC said if the House bill is enacted, the existing guidance will need to be updated.
“However, a regulation inconsistent with a statute generally will not be upheld,” Horn said. “Thus, it shouldn’t be fatal if the guidance wasn’t updated. At the state level, updates to regulations frequently lag legislative changes.”
Even if the bill doesn’t pass, businesses remain starved for more information, especially about what constitutes forgivable costs, Horn said. One open issue is what the government means by saying rent or lease payments on personal property can count as forgivable costs, she said, because it’s unclear whether that covers payments for leases on vehicles used for delivery.
Another big question is whether claims paid by businesses if health coverage is self-insured count as an allowable and forgivable payroll cost, Horn said.
There's also uncertainty about when the guidance applies to borrowers. Lane Powell PC lawyers, citing FAQ 17 of the SBA’s PPP loan FAQs, said in a June 1 alert that the rules in place when a borrower applies for a PPP loan are what’s binding. If a borrower applies for a loan based on the rules available on the application date, later changes won’t be binding on an already submitted loan application, the lawyers said.
That puts the focus on when the rules are binding. The SBA and Treasury have been using FAQs for a lot of the guidance, and while FAQs aren’t binding legal authority, they can be relied on by borrowers. The government has also been issuing interim final rules on the program, which often adopt language in an earlier FAQ.
However, the interim final rules generally are first released on Treasury’s website, and then days — and sometimes weeks — later the rules are published in the Federal Register. Interim final rules aren’t effective until they’re published in the register, so it’s unclear whether the rules and guidance available when a borrower applies for a loan include the date the guidance was posted on a website or if it's the date they’re published in the register, Lane Powell lawyers said.
But just because the rules available when a borrower applies for a loan are what matters, the rules for forgiveness that are available when the borrower applies for forgiveness are what count.
“Some borrowers might find their forgiveness expectations frustrating based on their expectations at the time they applied for their loan,” the Lane Powell alert said. “We do not think such borrowers will have much success in claiming they are not receiving the benefit of the bargain they anticipated because it was always clear that forgiveness guidance would follow shortly.”