PPP Loan: 60/40 Allocation Rule

In order to qualify for loan forgiveness under the federal Paycheck Protection Program (PPP), business clients are required to spend at least 60 percent of loan proceeds on qualified payroll costs. These costs, of course, include things like employee wages and salary (up to a $100,000 per-employee annual cap), rent and qualified health expenses. Congress maintained this 60/40 allocation rule in the Consolidated Appropriations Act of 2021, which both extends the current PPP loan program to new borrowers and authorizes a “second draw” loan option for smaller employers.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions on the extension of the 60/40 allocation rule.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: PPP loans aren’t merely a giveaway for business owners. We need to have a way to make sure that PPP borrowers are spending these loans on authorized purposes. The 60/40 allocation rule provides a degree of accountability so that business owners can’t simply spend the funds to grow their business in whatever way they choose.

Byrnes: The 60/40 allocation rule creates an unnecessary complication in a relief provision meant to give business owners help. Small businesses are suffering. They should be entitled to use the funds however they'll best suit the business. Giving employers more flexibility so that they don’t have to worry about the nit-picky details provides leeway to focus on the bigger picture: getting the business back on its feet in whatever way possible.

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Bloink: Eliminating the 60/40 rule would give business owners carte blanche authority to use the loan proceeds for whatever means they see fit. The entire purpose behind the loans is to allow struggling business owners to keep the lights on, pay their rent and, essentially, keep employees on payroll. There has to be some type of accountability in order for this highly experimental program to provide any benefit to the taxpayers who are funding it with their hard-earned tax dollars.

Byrnes: Yes, the funds are meant to support the economy. But how one business succeeds might not closely mirror what's best for another business owner. When applying for forgiveness is overly complex, business owners might shy away from asking for the loan in the first place and simply opt to shut their doors.

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Bloink: Sure, the program’s administration has to be reasonable. That’s why the new law contains a streamlined procedure for business owners who borrowed $150,000 or less in government funds. The 60/40 rule is necessary because, unfortunately, we can’t trust everyone to simply do what’s right. We’ve already seen businesses who have used PPP loan funds for purposes entirely unrelated to supporting their business. We need to keep a firm structure in place to drive use of loan proceeds toward keeping employees employed.

Byrnes: Fraud within the program can be handled through other means. As a whole, we need to make the PPP loan program workable for the very small business owner who can't afford to hire someone to make the complex calculations required under the current law. We’re also navigating a brand new economy—and so are the business owners this loan program is meant to benefit. If we’re overly rigid in requiring business owners to stick to the business model that worked before the pandemic, these loans might not end up helping anyone at all.