The intention of the CARES Act and the PPP was to allow businesses to preserve workers’ jobs during the coronavirus pandemic. There are ongoing discussions regarding the treatment of PPP loan forgiveness, its taxability and how it will affect overhead rates. The American Council of Engineering Companies (ACEC) is actively working on getting a more definitive response but at present, the best authority available is the Federal Acquisition Regulation (FAR).
FAR guidance combined with publications from various regulatory bodies indicates PPP loan forgiveness will result in a direct reduction of the indirect cost pool, consistent with FAR 31.201-5. Loans that are not forgiven will continue to be reported as debt and the proceeds can be used to pay for allowable operating costs, but, as per FAR 31.201-20, the related interest expense is not deductible. A direct reduction to the indirect cost pool may have significant impact on your overhead rate and, in turn, revenue.
This means that applying for forgiveness should not be automatic and it is extremely important to have a detailed analysis performed prior to requesting forgiveness of the PPP loan. Firms should consider overall contract portfolio, expectations of new or continuing contracts in the future and tax rates. It is likely that for firms working primarily on government contracts, loan forgiveness likely will be less than the recoverable amount based on the overhead rate. There is more to come on this subject and Withum will be publishing information as rulings come out.