There have been a lot of recent developments related to the Paycheck Protection Program (PPP) loans and related loan forgiveness.
I’ve been spending a large percentage of my time on these issues, and I want to provide you an update to ensure you are aware of the issues and how they might impact your firm. If your firm has applied for or received a PPP loan, likely you have been following the press and you are aware of some of these issues.
Here are the top three issues, as I see them (in no particular order):
- SBA definition of loan necessity
As I noted in our last blog post, on April 23, the Small Business Administration (SBA) issued a new Frequently Asked Question (FAQ) #31 to further define its position with regard to necessity of the loan. The full text of the FAQ can be found at the SBA’s website.
- IRS position on deductibility
I’ll start by noting that A/E Clarity and our related CPA firm, D. L. Purvine, CPA, PLLC, do not provide tax advice or perform tax services. Please consult your tax advisor. Last week, the IRS issued Notice 2020-32 which notes, in part “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in the forgiveness of a covered loan under section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)”. This, in effect, makes the loan forgiveness taxable. Note that certain members of Congress and industry groups are seeking to change this ruling through additional legislation.
- Potential impact on overhead rates
It is possible that any loan forgiveness received under a PPP loan will result in a credit to a firm’s overhead rate to the extent the loan proceeds were used to pay allowable overhead expenses, through the application of FAR 31.201-5 Credits. The Department of Defense (DOD) has already taken that position. ACEC is actively working to achieve more favorable treatment of the loan forgiveness, both from the standpoint of impact on overhead rates and tax deductibility of the expenses. There is a large group actively engaged in these issues. It’s not possible to know at this time what the ultimate outcome will be, but I feel it’s important at this point to make you aware of the issue.
For A/E firms that have either applied for or received PPP loans and will seek loan forgiveness, it is possible that the combined effects of items 2 and 3 could have a net negative impact (less net cash flow rather than more) as a result of the PPP loan forgiveness, rather than a net positive impact. The ultimate impact will depend on the resolution of those two items. It’s important for you to examine the possible effects of both issues in making decisions regarding pursuit of these loans and loans forgiveness.
I will post updates on this and other topics as we learn more – please check the blog on our website for any new information. If you have any questions, please email me at email@example.com.