The COVID-19 relief package released July 27 by the Senate includes an extensive array of changes to the Paycheck Protection Program to provide more relief and program flexibility, but also tighten the reins on the lending.
The small business relief portion of the GOP’s $1 trillion Health, Economic Assistance, Liability and Schools (HEALS) Act offered by Sens. Marco Rubio (R-FL), Chairman of the Senate Small Business and Entrepreneurship Committee, and Susan Collins (R-ME), would provide $190 billion of committed and appropriated funds to support the PPP and PPP “Second Draw Loans” to allow the most severely affected small businesses to receive a second PPP loan. The Continuing Small Business Recovery and Paycheck Protection Program Act would also create a new long-term recovery loan program, which would provide working capital to industries that have been hardest hit by the COVID-19 pandemic.
Second Draw Loans: Under the Rubio/Collins bill, businesses would have to had seen their revenues decline by 50% or more in the first or second quarter this year compared to the same quarter last year to be eligible to receive a second PPP loan. In general, borrowers may receive a loan amount of to 2.5 times average total monthly payroll costs in the one year prior to the loan, up to $2 million. The 60/40 cost allocation between payroll and non-payroll costs in order to receive full forgiveness would continue to apply.
However, these second forgivable loans would be limited to entities with 300 or fewer employees. The bill also creates an additional set aside of $25 billion in funds for businesses with 10 or fewer employees. It also includes a $10 billion reserve for community financial institutions to access second draw funds.
Entities that would be ineligible for the second draw loans include publicly traded businesses, entities listed in 13 C.F.R. 120.110 (except for entities from that regulation which have otherwise been made eligible by statute or guidance) and businesses in financial services which received a PPP loan in the first round of funding.
Program Changes: The Rubio/Collins bill would allow businesses to utilize forgivable PPP funds for personal protective equipment for workers, necessary expenses for businesses to operate safely amid the pandemic, operations expenditures and similar expenses. The legislation would also clarify that other employer-provided group insurance benefits are included in payroll costs.
But to help ensure continued access to the program, the bill reduces the maximum amount borrowers may receive under the first round of PPP funding from $10 million to $2 million.
The bill would also simplify the forgiveness application and documentation requirements for smaller loans under $150,000. Additionally, it would further expand eligibility to certain 501(c)(6) organizations with 300 employees or fewer, if, the organization does not receive more than 10% of receipts from lobbying.
Long-term Recovery Sector Loans: The bill creates a guaranteed long-term, low-interest working capital product by improving the terms of 7(a) loans for seasonal businesses, minority-owned firms and businesses located in low-income communities. The nearly $60 billion loan program aims to ensure that these businesses have the necessary resources to weather the COVID-19 pandemic, according to the sponsors.
The loans would equal two times a borrower’s annual revenues, up to $10 million, with a maturity of up to 20 years at an interest rate that is fixed at 1% to the borrower. To be eligible, businesses must employ 500 or fewer employees and have seen their revenues decline by 50% or more in the first or second quarter this year compared to the same quarter last year.
A summary of the Rubio/Collins small business relief package is available here.
House HEROES Act
The House-passed Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800) also includes an extensive array of changes to the PPP, some of which appear to overlap or share some similarity with the Rubio/Collins bill, including the carving out of funds for small and minority-owned businesses, and changes to provide additional program flexibility.
One item that stands out is that, unlike the Senate bill, the House bill includes a clarification reversing the IRS’s interpretation to deny deductions for otherwise deductible expenses under the loan forgiveness of the PPP. The IRS’s interpretation that these expenses would not be deductible caught the attention of the chairmen of the congressional tax-writing committees, who introduced legislation to reverse the interpretation.
Looking ahead, the two competing House and Senate versions of PPP changes will have to be resolved, but the fact that the program generally has been supported on a bipartisan basis and has been revised and extended in subsequent legislation since the CARES Act was enacted suggests that additional changes to the program are achievable.
