House bill gives small businesses more time to use PPP loans and lets them spend less on payroll

A bill that passed yesterday in the House of Representatives has some sought-after changes to a forgivable loan program for small-business owners.

The new legislation, the Paycheck Protection Program Flexibility Act, addresses entrepreneurs’ concerns around loan forgiveness, one of the main attractions of the Paycheck Protection Program. It passed the House on Thursday in a 417-1 vote.

Some loan recipients, like the self-employed and others whose largest costs are non-labor expenses, stand to benefit more than others.

The PPP, created by the $2.2 trillion coronavirus relief law known as the CARES Act, began issuing forgivable loans to small businesses in early April.  

Loan funds must be used a certain way, otherwise business owners risk the loan not being fully forgiven and incurring at least some debt.

The bill extends the length of time businesses have to use the loans, to 24 weeks from eight weeks, and pushes back a June 30 deadline to rehire workers.

It also reduces the share of funding that must be directed toward payroll costs, to 60% from 75%.

“The [legislation] grants small-business owners urgently needed flexibility by extending the loan forgiveness period and reducing the payroll limitation of the program,” said Kevin Kuhlman, vice president of government relations at the National Federation of Independent Business, a trade group.

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The bill’s passage comes amid debate between lawmakers over the contours of a potential future round of financial relief. The coronavirus pandemic pushed broad swaths of the economy to shut down in mid-March and nearly 41 million Americans to file for unemployment.

Business owners who received a PPP loan have expressed concern that they will be unable to use their funds in a manner consistent with current loan-forgiveness rules.

Lawmakers meant the loans as bridge funding to help keep people employed and cover operational costs until the economy reopened and business activity resumed, said Paul Becht, CPA, a partner at accounting firm Margolin, Winer & Evens.

But the original eight-week time frame has proven to be too short for many businesses, since many are still idled.

“People thought two months was probably going to be enough to get it done,” Becht said. “It turned out, it’s not.”

This is especially true for businesses in states and regions like the New York metropolitan area that have moved more cautiously to reopen their economies.

Hospitality businesses like restaurants and recreational facilities such as gyms that may reopen in later phases — and likely won’t see a quick return to their prior customer base, amid social-distancing concerns — also stand to benefit most from a time extension to use money and rehire workers.

The current PPP terms also require 75% of funds to be used for payroll costs, in a bid to tamp down on already widespread layoffs. The remainder can be used for other expenses like rent, mortgage interest and utilities.

However, it may prove challenging for small businesses with low payroll costs relative to other expenses to meet the 75% threshold.

That’s especially true for the self-employed, those with few employees and businesses in metropolitan areas that have high rent payments, Becht said.

The PPP Flexibility Act would grant more leeway, so 40% of the loan could be directed toward non-payroll costs.

Of course, it’s an open question as to how enacting new PPP forgiveness measures would help early movers who may have gotten their loans at the beginning of April. Those who have been spending money according to the original forgiveness terms may have nearly depleted their funding already.

Some business owners decided not to spend their aid and, if legislation passes, may be rewarded for that risk, Becht said.