The HEALS Act and PPP
Comparing HEALS and HEROES Act Provisions for the Paycheck Protection Program
On July 27, Senate Republicans announced the details of their $1 trillion COVID-19 stimulus package, the Health, Economic Assistance, Liability Protection and Schools Act, follow-up legislation to the Coronavirus Aid, Relief, and Economic Security Act passed in March.
In the HEALS Act, what are the bill’s useful improvements to the Paycheck Protection Program? The proposed changes to PPP in the HEALS Act overlap with some of the changes to PPP that were included in the House-passed Health and Economic Recovery Omnibus Emergency Solutions Act, though there are important differences between the two. How PPP is addressed in HEROES is also reviewed below.
PPP in the HEALS Act
The HEALS Act makes some useful improvements to the Paycheck Protection Program for farmers, yet still falls short in a few areas. But first, the improvements.
The HEALS Act makes a distinction between first-draw and second-draw loans. First-draw loans continue to follow the initial SBA eligibility criteria, i.e., any small business is eligible, including sole proprietors, independent contractors and self-employed persons with 500 or fewer employees. Previously, however, many farmers organized as sole-proprietors found themselves unable to utilize the PPP because of the program’s reliance on net profits from the farmer’s Schedule F. The HEALS Act would improve this situation significantly by allowing sole proprietors to use gross receipts instead of net profits for their payroll.
The HEALS Act caps the maximum loan eligibility at $100,000 in gross receipts, but the utilization of gross receipts is a significant improvement.
The bill maintains the requirement that 60% of the loan proceeds be utilized for labor costs in order to receive full loan forgiveness. However, the HEALS Act adds forgivable expenses to the list of non-labor costs that would qualify for a PPP loan. The list of expenses now includes covered supplier costs, covered worker protection expenditures and covered operations expenditures.
Speaking of loan forgiveness, the HEALS Act simplifies the forgiveness application process for smaller loans. If a borrower’s PPP loan is less than $150,000, the borrower must simply sign a form indicating they spent the funds in compliance with the program and retain records for three years, instead of completing the certification worksheets. If the loan is between $150,000 and $2 million, the borrower must still complete the certification worksheets, but the borrower does not need to present the worksheets to the bank from which the loan was received, just to the Small Business Administration. The borrower must maintain records and worksheets for three years.
Many growers have previously expressed frustration about the restrictions related to the period of time for which they can use borrowed funds. The HEALS Act addresses this by allowing borrowers to select any eight-week period between when they receive the loan and Dec. 31, 2020, to use the forgivable loan proceeds.
The HEALS Act also creates a distinction for PPP borrowers who might want to reapply for the PPP program for a second loan. In order to be eligible for a second loan, a borrower must meet slightly different criteria. First, a borrower must not have more than 300 employees. Second, a borrower must meet the SBA revenue size standards, if applicable. Revenue size standards do exist for agriculture. And third, a borrower must demonstrate at least a 50% reduction in gross receipts in the first or second quarter of 2020 relative to the same 2019 quarter.
While the HEALS Act would improve farmers’ access to PPP, there are several omitted potential improvements. First, the HEALS Act maintains language from the CARES Act that excludes any compensation of an employee whose principal place of residence is outside of the United States. Many lenders have interpreted this to mean that H-2A workers in the United States do not qualify as employees under the PPP and that wages paid to these employees are ineligible for loan forgiveness.
Allowing farmers to use PPP to cover worker protection expenditures is a significant improvement but there is less clarity around using PPP funds used to offset costs associated with farmworker housing and transportation costs. Many farmers provide housing for agricultural employees that have been modified to comply with federal health and safety guidelines and rented additional vehicles to mitigate COVID spread by limiting vehicle occupancy. Making farmworker housing and transportation costs eligible for PPP loan forgiveness would significantly improve the bill.
The HEALS Act does not clarify that expenses incurred while operating a business under a PPP loan are deductible as normal and customary business expenses for income tax purposes. Until this is clarified in legislation, PPP loans will be taxed as income.
Since the creation of PPP, a point of confusion among farmers has been which rental payments are eligible for loan forgivingness. Farmers often have rental payments for all kinds of business-related items, including agriculture equipment, land and buildings. These items should be included in the calculation for determining loan forgiveness, though this isn’t clarified in the HEALS Act.
While the movement to gross receipts as the basis for loan eligibility is an improvement for sole proprietors, to fully account for all farmers’ income sources, income from farm equipment trades, breeding livestock and all rental income should be included in the calculation of income for loan availability. These additional income sources are excluded from the HEALS Act.
PPP in the HEROES Act
The HEROES Act would also make some important improvements to the PPP. First, similar to the HEALS Act, the HEROES Act would extend the covered period from June 30 to Dec. 31. However, the HEROES Act goes further and allows borrowers to spend borrowed funds over a 24-week period, rather than an eight-week period.
The HEROES Act would also eliminate the rule that 60% of loan proceeds must be used on labor expenses. This would allow farmers to utilize a larger share of forgivable loan proceeds on approved non-labor expenses, like rent.
Through July 24, 2020, the agriculture, forestry, fishing and hunting industry has accounted for 1.53% of all PPP loans. Through that date, 140,061 PPP loans totaling $7,932,302,584 have been approved by approved PPP lenders. Changes to the PPP should make the program more appealing and useful to farmers and ranchers. With nearly $130.1 billion in PPP funding remaining, a lot of good that can still be done.
Veronica Nigh, Economist