Unlike popular preconceived notions, it is significant to note that FAR 31.201-5 encompasses all costs, not just indirect costs. DCAA stated in a recent alert that “the credit should apply to contract costs in the same manner in which the PPP loan funds were originally spent by the contractor.”
It is important to note that many state Departments of Transportation have advised firms to credit overhead for the entire forgiven PPP loan. Given this, firms can calculate and include multiple overhead rates in their reports.
If one is not already in place, firms should establish a policy on credit application. Then, critically look at contracts charged and other expenses during the entire 24-week covered period.
To minimize the application of credits to allowable indirect costs, the entire 24-week covered period should be used. Any forgiveness of PPP loans should first be applied to direct labor of commercial contracts, as long the loan proceeds were truly spent in such manner. Thereafter, forgiveness could be applied to unallowable indirect costs before being applied to allowable indirect costs.
Loans that are not forgiven will continue to be reported as debt. 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.
Applying for forgiveness should not be automatic, and it is extremely important to have a detailed analysis performed before requesting forgiveness of PPP loans. Firms should consider overall contract portfolios, expectations of new or continuing contracts in the future, and tax rates. Loan forgiveness will likely be less than the recoverable revenue amount based on the overhead rate for firms working primarily on government contracts.
Author: Christina Lazaro | firstname.lastname@example.org