The COVID-19 pandemic has affected everyone in some way. Legislatively, the government implemented the Paycheck Protection Program loan (PPP), the cornerstone of the CARES Act, which provides for forgivable loans administered by the Small Business Administration. The amount of the PPP loan is based on a company’s average monthly payroll cost for 2019. Under this loan, a company could receive 2.5 times that amount to assist with covering eight weeks of payroll and certain overhead expenses. This period was later extended to 24 weeks.
PPP funds can be used for the following expenses and are eligible for forgiveness:
The following conditions also apply for forgiveness:
There could be some relief for businesses that were unable to hire employees to fill empty roles which are as follows:
Construction companies with former or current employees meeting one of these criteria may have an exemption to include for their average FTE calculation. Documentation of these exemptions is extremely important to support these exemptions. Maximizing PPP loan forgiveness requires a thorough understanding of all aspects and conditions that apply to the rules.
Furthermore, subsequent clarification to the PPP program created some uncertainty and challenges for companies that applied for the PPP loan, provided the required certifications, and, after obtaining the funds, learned that loans in excess of $2 million could be subject to an SBA audit, which could mean requests for additional certifications to support the company’s overall financial position and liquidity needs.
This change has caused some companies to repay their loans despite their financial need, while others are waiting to see what additional documentation will be requested in an audit.
To avoid having a loan on their financial statements, which could affect financial ratios and possibly limit surety credit, many contractors are applying for loan forgiveness by the end of their fiscal year.
However, the IRS has cited that costs are not deductible when paid from tax-free income, making it challenging for construction companies to manage the tax consequences and financial statement impact of loan forgiveness.
What began as a “tax-free” forgivable loan has since become non-deductible or, essentially, taxable. Another “OUCH” for the construction industry in the COVID-19 pandemic era.
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