9 Ways To Improve The Paycheck Protection Program

By Samantha Block
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Law360 (May 20, 2020, 5:50 PM EDT) --
Samantha Block
Samantha Block
While it is easier to criticize a program after it has been implemented than it is to design it in the first place, we should not shy away from critically evaluating the Paycheck Protection Program's problems. The following are some issues I see with the PPP, which was created by the Coronavirus Aid, Relief, and Economic Security, or CARES, Act.

Lower the Maximum Loan Size

My first suggestion is to lower the $10 million maximum loan size to disincentivize large businesses from applying and open up more funds for struggling small businesses.

In the first round of funding only 4% of loans were for more than $1 million, but they consumed 44.5% of available funds.[1] In response, the U.S. Department of the Treasury announced that it will perform "full audit[s]"[2] of every loan over $2 million, signifying a concern that loans this large are not going to the program's intended recipients. In an effort to alleviate small businesses' concerns, the Small Business Administration reversed its earlier guidance and announced that it would automatically consider loans under $2 million to be certified in good faith.[3]

A $2 million cap would free up billions for struggling small businesses and preserve Treasury resources.

Extend Eight-Week Pay Period

Once PPP funds are disbursed, a business has eight weeks to spend the loan on covered expenses. This means, despite a lack of demand and revenue, small businesses may be required to bring back employees that they will be unable to sustain if the pandemic response continues longer than eight weeks. Instead, a flexible eight-week pay period where borrowers may wait until stay-at-home restrictions are lifted could help businesses avoid unnecessary hiring and firing.

Extend Two-Year Term

Borrowers must repay PPP loans within two years. But if the 2008 financial crisis any indication, most small businesses will not recover within two years. Instead, the SBA and Treasury should extend the loan term to at least five years (the Treasury may extend the term up to a maximum of 10 years).[4]

Change 75-25 Rule

In an effort to protect the employees of small businesses, Congress does not necessarily protect the small businesses themselves. To be eligible for full loan forgiveness, effectively converting the loan into a grant, borrowers must spend at least 75% of PPP funds on payroll expenses. Note that despite the pandemic forcing businesses to move operations online, PPP funds do not cover technology costs. This arbitrary rule uses a one-size-fits-all approach and ignores those businesses whose largest expenses are rent and utilities, not payroll.

For now, most small businesses are unable to run at full capacity (e.g., restaurants and salons can serve fewer customers at a time because they must maintain social distancing). Under the current rule, however, a restaurant that only reemploys half its staff — but still is responsible for 100% of its rent — is only eligible to have 50% of its loan forgiven. This is a major design flaw in that even if a small business can meet its payroll expenses, if it cannot afford its operational costs and goes bankrupt then the employees are again without a job, but this time indefinitely.

Redefine What Constitutes a Small Business

In response to criticism that large public companies were monopolizing PPP funds, the SBA issued new guidance clarifying the loan's eligibility requirements. In light of the new guidance, the SBA created a safe-harbor provision allowing borrowers to return PPP funds obtained based on a misunderstanding. Unfortunately, the SBA continues to rely on an borrower's "good faith" certification that a loan is necessary and threats of enforcement.[5]

Not only is the "necessary" requirement vague, but also relying on businesses to self-regulate is not an effective solution. Instead of merely hinting that public companies are "unlikely" to qualify,[6] the SBA should remove industry exceptions allowing companies with as many as 1,500 workers to qualify and lower the employee threshold in general.

Prioritize Small Businesses

In place of the "first-come, first-served" approach for processing applications, businesses with little liquidity or fewer than 50 employees should be first in line. Congress recently amended the PPP to set aside $60 billion in funding for smaller banks.[7] While this hopefully assists small rural businesses' access to PPP funds, it places the small businesses that use large banks at a disadvantage. Moreover, small lenders' processing capabilities are slower than that of large intuitions, putting their customers at a huge disadvantage in a program built on expediency.

Instead of prioritizing small banks, which large businesses also use, Congress should designate funds for small loans and businesses with 50 or fewer employees. Wells Fargo's CEO vowed to prioritize small businesses and explained "[w]hile all businesses have been impacted by this crisis, small businesses with fewer than 50 employees and nonprofits often have fewer resources."[8]

Forbid Lenders From Implementing Application Restrictions

Initially, only SBA certified 7(a) lenders were automatically qualified to participate in the PPP process, excluding many community banks. Recently, the government extended participation to include regional banks and fintech firms, such as PayPal and Intuit QuickBooks. However, like many large banks, PayPal and QuickBooks are focusing on current customers.[9] With relaxed underwriting standards and more than $10 billion in processing fees generated thus far, it is difficult to sympathize with the banks. Therefore, the government should prohibit lenders from imposing application restrictions to ensure all small businesses can access PPP funds. Alternatively, Congress could consider appealing to the banks' self interest and offer higher processing fees for new clients.

Clarify Tax Implications

Unless Congress provides for an explicit exception, forgiveness of a business loan typically results in taxable income. Under Section 1106(i) of the CARES Act, the portion of a PPP loan that is forgiven is not considered taxable income. The program, however, is silent on the tax implications of expenses funded by the forgiven loan.

Generally, expenses such as payroll, rent, and utilities are deductible expenses. However, on April 30, the IRS issued a notice clarifying that borrowers may not claim tax deductions for otherwise deductible expenses if they are used in the PPP loan forgiveness calculation.[10] The IRS relied on Section 265 of the Tax Code, which prohibits the deduction of expenses associated with income that is exempt from taxes (i.e., the PPP loan).[11] In other words, the PPP funds that are forgiven are not considered taxable income but expenses used to obtain the forgiveness (payroll, rent, utilities, etc.) are no longer tax-deductible, essentially invalidating Congress' tax exemption.

Section 1106(i) suggests that Congress intended for expenses paid for with PPP funds to also be tax-deductible. If this is the case, Congress should pass a law to permit an exception to Section 265 to permit borrowers to deduct covered expenses as they otherwise would have.

Define Key Terms

This is by no means an exhaustive list, but the following are some terms that continue to cause confusion:

Good Faith

Borrowers must certify in good faith, taking into account alternative sources of liquidity, an economic need for the loan. Although the SBA and Treasury have attempted to dissuade public companies and hedge funds from applying for PPP loans, they have largely failed to provide bright-line rule. For example, the guidelines remain silent n on what constitutes "liquidity" and what other alternative sources of funds may be considered disqualifiers. (Notably, the CARES Act waives the requirement that borrowers must be unable to obtain credit elsewhere.)

Rehire Requirements

A borrower is not eligible for full forgiveness unless they retain the same number of employees that they had prepandemic. If a business already laid off or furloughed employees, they may still be eligible for full forgiveness if they rehire the same number of employees by June 30. However, it is unclear how this applies to businesses whose covered period is during the June 30 time frame.

Loan Application Questions

Although the SBA's release of the much-anticipated PPP Loan Forgiveness Application answered many questions, it also caused some confusion.[12]

For example, the PPP terms suggested that both the principal and interest were eligible for forgiveness but the application only mentions principal. Another ambiguity in the application pertains to its clarification on covered expenses. The instructions indicate that payroll costs incurred prior to the covered period are eligible for forgiveness as long as they are paid during the covered period and prior to the next payroll date. However, it is unclear whether payroll costs incurred during the eight-week period qualify for forgiveness if they are not paid during the covered period (e.g., business that pay on a bi-weekly basis).

The SBA should update the rules to ensure that payroll expenses paid and incurred during the covered period are eligible to count for forgiveness.

Looking Ahead

The program, which was well-intentioned, has been a roller coaster, with post-hoc rulemaking that often provides more questions than answers. And if history is any indication, borrowers are likely to face enhanced scrutiny for years to come. For example, the Troubled Asset Relief Program, a response to the 2008 financial crisis, resulted in 380 convictions and recovered more than $11 billion.[13] More than a decade later, TARP participants are still facing scrutiny — approximately $900 million was recovered in 2019.

All of this to say, borrowers should think twice about alternative funding options, public perception, potential legal risk (including criminal liability), and be prepared to justify their eligibility for years to come.



Samantha Block is a judicial law clerk for the U.S. Court of Federal Claims and a former associate at Akin Gump Strauss Hauer & Feld LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of Portfolio Media Inc. or any of its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] https://www.politico.com/states/new-york/city-hall/story/2020/04/17/schumer-senate-democrats-demand-small-business-loan-data-1277623

[2] https://www.cnbc.com/2020/04/28/small-business-loans-above-2-million-will-get-full-audit-to-make-sure-theyre-valid-mnuchin-says.html

[3] https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

[4] https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf

[5] https://www.cbsnews.com/news/paycheck-protection-program-replenished-loopholes/

[6] https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

[7] https://www.npr.org/2020/04/22/838870536/read-whats-in-the-latest-coronavirus-relief-bill

[8] https://www.businesswire.com/news/home/20200405005041/en/Wells-Fargo-Receives-Strong-Interest-Paycheck-Protection

[9] https://www.uschamber.com/co/run/finance/list-of-fintech-companies-offering-ppp-loans

[10] https://www.irs.gov/pub/irs-drop/n-20-32.pdf

[11] https://www.irs.gov/pub/irs-tege/13%20Phase%20I%20Lesson%2013%20-%20Bank%20Qualified%20Bonds%20-%20Section%20265.pdf

[12] https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf

[13] https://www.sigtarp.gov/Press%20Releases/Crimes_Fines_Press_Release_Proposal.pdf

For a reprint of this article, please contact reprints@law360.com.

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