Bipartisan support is growing for a fix to the massive new small-business lending program created in March that would let recipients spend less on payroll and still qualify for debt forgiveness.
Businesses, including many restaurants and hotels, have complained that the forgivable loans offered under the so-called Paycheck Protection Program come with too many strings attached.
The Small Business Administration, which runs the program, has required that at least 75 percent of the loan money be spent on payroll to meet a congressional objective of keeping workers employed during the COVID-19 pandemic.
But restaurants, which can operate with skeletal staff, often find that lease or mortgage payments make up 50 percent of their monthly costs, according to the National Restaurant Association. And lawmakers have begun to recognize the problem.
A bipartisan group of 21 senators, led by Sens. John Cornyn, R-Texas, and Bob Menendez, D-N.J., sent a letter to the administration Wednesday seeking to raise the 25 percent limit on nonpayroll expenses to at least 50 percent, as the main restaurant group has called for.
“The 25 percent threshold is problematic for several business sectors, especially those whose mortgage, rent, or utility payments constitute a large portion of fixed monthly expenses,” the senators wrote to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. “If they are unable to cover these expenses, they will have to decide between keeping their doors open, at personal financial risk, or closing shop and laying off employees. These are businesses that will not recover.”
Speaker Nancy Pelosi has likewise called for easing the 25 percent limit. “I don’t even know why we have that in there,” the California Democrat said at a Tuesday forum with small business owners. “I guess to make sure people are spending it on employees. But we want to help the business, we don’t want to complicate [things].”
The March rescue package that created the small-business aid program is silent on how much of an eligible firm's loan must go to payroll versus other fixed costs in order to qualify for principal forgiveness.
The only restrictions laid out in the statute are that the amount of debt relief is reduced proportionally by any headcount reductions during the eight-week period covered by the loan, as well as any salary cuts in excess of 25 percent for employees making less than $100,000.
The SBA and Treasury Department settled on the cap of 25 percent on any loan dollars going to nonpayroll expenses in their implementing guidance, citing the huge demand for loans as well as congressional intent to keep workers employed.
“I think 25 percent for overhead is very fair,” Mnuchin told Fox Business on Monday. “This was not designed as a loan. It was designed as a grant.”
Mnuchin said businesses that want to borrow more for overhead can apply for Economic Injury Disaster Loans, which offer 30-year borrowing terms.
Ball in lawmakers' court
Without a change in administration guidance, it would take an act of Congress to fix the program's loan forgiveness rules.
The strong bipartisan support in both chambers suggests such a fix may be one of the easier items to negotiate as part of the next coronavirus relief package. FiscalNote, the parent company of CQ Roll Call, has received a loan under the program.
But Sen. Susan Collins, R-Maine, expressed reservations about providing too much flexibility. “I’m open to some adjustment to that, but I think the majority of the money should go for paychecks,” she said. “The whole idea is to help businesses retain workers that otherwise would have been laid off.”
And even if the nonpayroll threshold were lifted, restaurant owners have said the program still has other flaws. The loans were designed to last only eight weeks, with the expectation that businesses could reopen by then.
But the persistence of COVID-19, which has killed more than 70,000 Americans, according to data compiled by Johns Hopkins University, means many businesses have stayed shuttered longer than expected — or must reopen at reduced capacity to abide by social distancing rules.
“No one expects restaurants to open in the next eight weeks,” said Naomi Pomeroy, who runs a small restaurant called Beast in Portland, Oregon. She spoke to reporters on a conference call last month urging a revamp of the program.
Several lawmakers said Wednesday they recognized that problem and were considering ways to address it. “The eight weeks is gonna run out before you know it,” said Sen. Lindsey Graham, R-S.C., who also favors easing the 25 percent cap on overhead expenses. “Most restaurants and hotels are still going to have a problem staying in business.”
Pelosi echoed that view at a forum with small businesses on Tuesday. “I certainly think we have to extend the loan forgiveness period,” she said.
And Senate Small Business Chairman Marco Rubio, R-Fla., a key architect of the program, said Wednesday that loans would likely need to be extended.
“I was with a group of restaurant owners yesterday, and they are four weeks into the eight weeks now — if you got their loans at the beginning of this deal — and there is no way they are going to be up and running. So we got to start talking about that," he said on "Fox & Friends."
But Mnuchin appeared resistant. “This was the way the program was designed by Congress and we think it has the right intent to get the money to employees," he told Fox Business. "So I don't have the flexibility to change that."
Lawmakers are also seeking to fix what they said was an unfair tax burden created by the Paycheck Protection Program. Businesses that get a loan are then unable to deduct ordinary business expenses.
“We did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for a PPP loan,” wrote Senate Finance Chairman Charles E. Grassley, R-Iowa, ranking Democrat Ron Wyden of Oregon and House Ways and Means Chairman Richard E. Neal, D-Mass., in a letter to Mnuchin Wednesday.
But on that front, too, Mnuchin signaled his opposition. Since money in the loan program is not taxable, he said, standard tax law prevents business expenses incurred under those loans from being deducted.
“You can’t double dip,” he said on Fox Business. “This is basically Tax 101. It’s a simple rule.”
Lindsey McPherson, Jim Saksa and Jennifer Shutt contributed to this report.