Note that information and guidance on the PPP loan program is fluid and changing on a daily basis. We’re working to provide the most recent information available.
Specific updates noted below.
AICPA PPP FAQ
The American Institute of Certified Public Accountants (AICPA) published and maintains an excellent and exhaustive list of FAQs about the PPP program. We recommend bookmarking their site and referring to it often.
SBA provided additional guidance regarding the safe harbor for good faith certification concerning necessity of the loan. Companies that received less than $2M in PPP funding will be treated as having acted in good faith when they made the original certification. Companies had until May 18 to return the funds with no questions asked. Those returning funds will be treated as if they acted in good faith and that they never received the funds. The SBA stated that they will inquire of all companies who received loans in excess of $2M. We think it’s safe to assume that “inquiry” means some form of fact-finding process up to and including a formal audit. SBA FAQ #43, 45,46 Updated 5/19/2020
The SBA and Treasury released additional guidance regarding forgiveness on May 15, that includes:
- Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles
This means borrowers can (and probably should) elect to align their 8-week coverage period with their payroll cycle for ease in calculating and reporting covered payroll costs.
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan
This means borrowers can include expense incurred but not yet paid within the 8-week period – a key issue for accrual-based accounting where the expense is recognized and recorded when incurred, but not yet paid. Previous guidance seemed to indicate that only expenses actually paid during the 8-week period would qualify.
- Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
- Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
- Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined
The additional guidance also includes the forgiveness application for borrowers to use when requesting forgiveness through their lender.
The CARES Act and FFCRA provide multiple options of economic relief for government contractors. They also provide multiple opportunities for confusion and errors. The number one takeaway: NO DOUBLE DIPPING!
Advice to government contractors: carefully plan your strategy after consulting with a professional (accounting or attorney). Getting this wrong could result in unforgiven loans, unallowable costs, and penalties and interest.
Paycheck Protection Program (PPP) Loans And Families First Coronavirus Relief Act (FFCRA) Employee Paid Leave – No Double Dipping
PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). SBA FAQ #8
PPP and Employee Retention Credit (ERC) – No Double Dipping
To qualify for PPP loan forgiveness, expenses must be incurred and paid during the 8-week period of coverage beginning on the date of first loan disbursement. Since ERC provides a tax credit (e.g. reduction in taxes paid), businesses cannot claim forgiveness for expenses not incurred and paid. JDSupra, Intuit, U.S. Treasury
PPP and Economic Injury Disaster Loan (EIDL) – No Double Dipping
You cannot use funds from both loans for the same purposes. For example, you can’t use both EIDL and PPP towards payroll. As long as you do not use the EIDL for payroll costs, your PPP eligibility will not be affected. If the EIDL is used for payroll costs, your PPP amount will have to be used to refinance the EIDL. You cannot have a PPP and EIDL for payroll expenses made between 1/1/2020 and 4/3/2020 (prior outstanding EIDL exempted).
Your EIDL advance grant cannot be combined with the PPP. The EIDL can come with an advanced grant of up to $10,000. As a grant, it won’t have to be paid back. However, it will be subtracted from the PPP loan forgiveness amount and has to be declared when you apply for the PPP.
Intuit has an excellent tool to aid in determining eligibility for a PPP or EIDL loan. This page also includes loan amount and loan forgiveness calculators.
PPP and Section 3610 – No Double Dipping
In short, the contractor must offset reimbursement for idle labor covered by Section 3610 by the amount of any credits “allowed” under other sections of the CARES Act, which includes the PPP. In general, this makes sense and ties to basic cost reimbursement principles: you cannot request reimbursement for an expense you did not incur or pay (or was otherwise paid or credited through another mechanism).
Note that DoD language differs from other agencies in that they state contractors “eligible to receive under any other Federal payment, allowance or tax credit,” not necessarily taken. For example, a contractor could take out a PPP loan for cash flow purposes only (not request forgiveness), but would not be allowed to invoice the government for expenses paid by the PPP loan – even if the loan is not forgiven.
Some contractors may receive compensation from other provisions of the CARES Act, or other COVID-19 relief scenarios, including tax credits, and contracting officers must avoid duplication of payments. For example, the [PPP] established pursuant to the CARES Act may provide, in some cases, a direct means for a small business to obtain relief. A small business contractor that is sheltering-in-place and unable to telework could use the PPP to pay its employees and then have the PPP loan forgiven, pursuant to the criteria established in the interim rule published by the [SBA]. In such a case, the small business should not seek reimbursement for the payment from DoD using the provisions of Section 3610. HK Law
DFARS 231.205-79 also extends the offset to credits beyond those in the CARES Act. It provides that for the cost to be allowable, it must be reduced by “the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020.” (DFARS 231.205-79(b)(6) (emphasis added).) Note that the reduction is not based on actual receipt; but, rather, on eligibility. And, it applies to a wide range of laws and receipts. This caveat is rife for disputes. ArnoldPorter
The maximum reimbursement authorized by section 3610 shall be reduced by the amount of credit a contractor is allowed pursuant to div. G of the Families First Coronavirus Response Act (Pub. L. 116-127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on Jan. 31, 2020 for COVID-19. DFARS 231.205-79 (see below)
Relief By Contract Type
Keys to relief on your contract:
- Are you able to continue work and otherwise meet the delivery requirements in your contract?
- If yes, you likely have no options for relief through Section 3610. Carefully consider your other options above and their impact on cost allowability.
- If no, you need to work with your contracting officer on an appropriate contract modification.
- Segregate all COVID-19 related expenses in your accounting system (including timekeeping and expense reporting). This may mean new or separate G/L accounts, projects/jobs, charge codes, classes, pay types, or other tool that allows for easy and accurate identification and reporting of COVID-19 related hours and expenses.
- You will not be allowed to invoice for increased COVID-19 costs AND seek relief through other Federal programs.
We cannot forget some basic cost principles found in FAR 31.201-5 Credits and FAR 52.216-7(h)(2) Allowable Cost and Payments. The former states that credits available to the contractor that are attributable (directly or indirectly) to a government contract must be credited to the government. The latter states that costs must have been incurred and paid to be allowable for reimbursement.Cost-Reimbursement Contracts
Entitlement to relief for increased paid leave costs under DOD contracts will be subject to the conditions in DFARS 231.205-79. This is not automatic and must be negotiated on a contract-by-contract basis with your contracting officer. Fixed-Price Contracts
DOD may provide, relief through modifications to fixed-price contracts and CLINs. The DOD contemplates that contractors will submit requests for equitable adjustments, or REAs, to seek relief for impacts resulting from the COVID-19 public health emergency under fixed-priced contracts and has provided direction to contracting officers who receive those REAs. Time-and-Material (T&M) Contracts
The DOD’s limited guidance on T&M and labor hour contracts suggests that they should be treated similarly to cost-reimbursement contracts. Contractors might consider asking their contracting officer to allow for the addition of a fixed-rate CLIN dedicated to compensation for paid leave associated with the COVID-19 expenses. Law360
PPP and IRS 265 Tax Deductibility
No double dipping??? Section 265 of the tax code generally prohibits firms from deducting expenses associated with income that is tax-free. This is intended to stop taxpayers from deriving a double benefit from tax-free income, maintaining neutrality in the tax code. However, disallowing deductions in the context of PPP would undercut the goal of the program. How does this align with Section 3610? While not all tax-deductible business expenses are allowable for government contracts (FAR 31.205), there’s a pretty clear link between expenses paid (cash basis) or incurred (accrual basis) for tax purposes and those reimbursable on government contracts. TaxFoundation.org
May 20, 2020 Update
The IRS provided guidance in Notice 2020-32 that expenses related to PPP loan forgiveness would not be deductible. That means that the forgiven PPP loan proceeds (while themselves are not taxable) are effectively taxable since the underlying expenses are not deductible. Note in the example below of a $100,000 PPP loan that revenue does not change since the forgiven PPP loan proceeds are not taxable. However, the $100,000 in expenses related to the PPP loan are now not deductible, so the net effect is that the loan proceeds are taxable. Many, including the AICPA, believe this was not Congress’ intent when making the forgiven PPP loan proceeds not taxable.
|Net Taxable Income||$150,000||$250,000|
See this Kiplinger article for example of the tax effect of a forgiven PPP loan. As this Forbes article points out, Congress could act to reverse IRC Section 265 treatment of PPP related expenses – definitely a topic to watch!
State Tax Treatment
How will states handle taxes of PPP loan forgiveness and related expenses? While most states follow U.S. tax code, there are often delays (measured in years) between alignment at the Federal and state levels. And, some states opt to treat certain types of revenue and expenses differently. For example, Ohio exempts certain pass-through income from taxation while the Federal government does not. TaxFoundation.org
Paycheck Protection Program
DFARS 231.205-79 Cares Act Section 3610 – Implementation
1. This cost principle applies only to a contractor:
1. that the cognizant contracting officer has established in writing to be an affected contractor;
2. whose employees or subcontractor employees:
1. Cannot perform work on a government-owned, government-leased, contractorowned, or contractor-leased facility or site approved by the federal government for contract performance due to closures or other restrictions, and
2. Are unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for Coronavirus (COVID–19).
2. The maximum reimbursement authorized by section 3610 shall be reduced by the amount of credit a contractor is allowed pursuant to division G of the Families First Coronavirus Response Act (Pub. L. 116– 127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020 for COVID– 19.
1. Notwithstanding any contrary provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7, costs of paid leave (including sick leave), are allowable at the appropriate rates under the contract for up to an average of 40 hours per week, and may be charged as direct charges, if appropriate, if incurred for the purpose of:
1. Keeping contractor employees and subcontractor employees in a ready state, including to protect the life and safety of Government and contractor personnel, notwithstanding the risks of the public health emergency declared on January 31, 2020, for COVID-19, or
2. Protecting the life and safety of Government and contractor personnel against risks arising from the COVID-19 public health emergency.
2. Costs covered by this section are limited to those that are incurred as a consequence of granting paid leave as a result of the COVID-19 national emergency and that would not be incurred in the normal course of the contractor’s business. Costs of paid leave that would be incurred without regard to the existence of the COVID-19 national emergency remain subject to all other applicable provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7. In order to be allowable under this section, costs must be segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained. Segregation and identification of costs can be performed by any reasonable method as long as the results provide a sufficient audit trail.
3. Covered paid leave is limited to leave taken by employees who otherwise would be performing work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractorleased facility approved by the federal government for contract performance; but
1. The work cannot be performed because such facilities have been closed or made practically inaccessible or inoperable, or other restrictions prevent performance of work at the facility or site as a result of the COVID-19 national emergency; and
2. Paid leave is granted because the employee is unable to telework because their job duties cannot be performed remotely during public health emergency declared on January 31, 2020, for COVID-19.
4. The facility at which work would otherwise be performed is deemed inaccessible for purposes of paragraph (b)(3) of this subpart to the extent that travel to the facility is prohibited or made impracticable by applicable Federal, State, or local law, including temporary orders having the effect of law.
5. The paid leave made allowable by this section must be taken during the period of the public health emergency declared on January 31, 2020, for COVID–19, up to and including September 30, 2020.
6. Costs made allowable by this section are reduced by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020, for COVID–19, such as the tax credit allowed by division G of Public Law 116–127.