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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:

  • payroll (salary, wages, vacation, family, medical or sick leave, health benefits);
  • mortgage interest (mortgage is required to have been signed before February 15, 2020);
  • rent (lease agreement was in effect before February 15, 2020); and
  • utilities (service is required to have begun before February 15, 2020).

The following conditions also apply for forgiveness:

  • 24-Week Coverage Period. Eligible expenses are those that are incurred over 24 weeks, starting from the date the PPP was funded by the lender. This is not necessarily the date on which the loan agreement was signed. December 31, 2020 is the cutoff date for eligible expenses. This means companies will not be able to take full advantage of the 24-week period if their loan was disbursed on or after July 16, 2020. 
  • 60/40 Rule. At least 60% of PPP must be used for eligible payroll costs, while the other 40% can be used to cover eligible non-payroll costs such as utilities, lease payments or mortgage interest payments. The original ratio to qualify for full loan forgiveness was originally 75% payroll costs and 25% non-payroll costs. However, the Paycheck Protection Program Flexibility Act changed the ratio to 60/40 to allow companies more flexibility in how they spend PPP loan proceeds.
  • Maintain Pay Levels. Any reduction in rates of pay or salaries that exceeds 25% will decrease the amount spent on expenses that are eligible for forgiveness.
  • Maintaining Employee Headcount. The FTE calculation converts a company’s total employee count (including both full- and part-time employees) into the “equivalent” number of full-time employees working 40 hours a week. The original loan forgiveness application clarified the base hours of 40 hours per week to calculate an FTE. There are two options of calculating the number of FTEs: (1) calculating based on actual hours worked or (2) simplified approach which allows employers to assign a 1.0 for each employee that works 40 hours (or more) per week, and 0.5 for any employees that work less than 40 hours per week. 

There could be some relief for businesses that were unable to hire employees to fill empty roles which are as follows: 

  • any positions for which the Borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020, and the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020;
  • any positions for which the Borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer; and
  • any employees, who during the Covered Period or the Alternative Payroll Covered Period were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours.

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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