04 May

Possible Impacts of PPP Loan Forgiveness

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):

  1. 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.
  2. 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.
  3. 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 dan@aeclarity.com.

 

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Dan Purvine
Dan Purvine is the President of A/E Clarity Consulting and Training, a firm that specializes in helping A/E firms to navigate the complex rules and regulations applicable to state, federal, and local agency contracts. Dan brings to this role over 14 years of experience in the A/E industry as the Vice President of Finance and Accounting for a large engineering firm. Dan has been providing A/E industry training through A/E Clarity since 2012 and has trained thousands of people in architecture and engineering firms, CPA firms and public agencies. Dan is the former chair of the American Council of Engineering Companies (ACEC) National Audit Subcommittee and continues to work closely with FHWA and AASHTO in his consulting role with ACEC to achieve uniform application of FAR Part 31 and the AASHTO Audit Guide, and to better address the needs of A/E firms nationwide. He has been heavily involved in the development of the AASHTO Audit Guide and the National Compensation Matrix, and works closely with the AASHTO Audit Guide Taskforce to continually improve the Guide as a tool for A/E firms, State DOTs, and CPAs. Dan works closely with state ACEC organizations and many state DOTs on issues related to FAR compliance, audits, and reimbursement of A/E firm costs. A/E Clarity provides training and consulting services and through a related CPA firm, D. L. Purvine, CPA, PLLC, Dan and his team perform overhead audits for clients nationwide. Dan also served as the 2015-16 Chair of the North Carolina Association of CPAs and is a former member of the AICPA Council.

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