July 29, 2020

PPP Loan Forgiveness – Construction Contractors

The Paycheck Protection Program (PPP) has been a useful tool in helping construction contractors weather the COVID-19 pandemic. As of June 30th, over 466,000 loans have been issued to industry companies totaling more than $64B. These numbers are stunning and reflect not only the depth of economic impact but also the popularity of the program. The earliest borrowers finished out the eight-week covered period this summer and have already entered the forgiveness stage, while others are at the beginning of their 24-week loan covered period. Navigating the PPP loan forgiveness stage is just as important as correctly spending the funds, and documentation requirements can be confusing. While each lender will have its own requirements for forgiveness documentation, but in general these are helpful guidelines to follow to ensure a more transparent, predictable process.

PPP Loan Audits and Reviews

The SBA has stated that any PPP loan more than $2 million will be subject to review. This is partly to keep the public satisfied with a more transparent lending process, but also to ensure that larger companies with access to capital genuinely needed the funds. Recall that as part of the application, borrowers were required to certify that ongoing economic uncertainty made the loan a necessity to continue operations. This certification is likely to be the focus of SBA reviews and audits, and borrowers may be required to demonstrate it.

This is of interest to the construction industry because contractors can reasonably keep a large cash reserve for committed obligations, like pension funds, ESOP payments or capital for a future job. Therefore, when submitting the forgiveness application, be sure to note any such obligations and provide documentation to support any claims. Be prepared to include the rationale for justifying the necessity of the PPP loan versus other alternatives.

Expect that loans under $2 million may be audited as well. Construction currently accounts for the third-largest industry segment to receive PPP funds. It is reasonable to expect that the industry will incur a significant amount of SBA oversight. To protect against any unpleasant enforcement actions or future requirement to repay all or part of the loan proceeds, it is vital to keep thorough and accurate documentation for every PPP-related transaction.

Accounting Guidelines

The covered period for PPP loans starts the day that it is disbursed. From that point on, there are 24 weeks to use loan proceeds on allowable expenses. Remember that until and if the PPP loan is forgiven, it is a short-term liability. If not all of the loan proceeds will be forgiven, decide how to approach the repayment, which is a five-year maturity loan with one percent interest. The AICPA does permit other revenue recognition models to account for loan proceeds if the company expects the funds to be forgiven. Talk with the advisors at Wilson Lewis to discuss these options further.

Construction and other companies should be prepared to produce, at a minimum:

• Payroll processor records
• Payroll tax filings
• OR: Form 1099-MISC for self-employed construction owners
• Bank records
• Utility, mortgage, and/or rent statements
• Lease agreements
• PPP application and any documents related to PPP transactions

Safe Harbors for FTEs

The purpose of PPP funding was to keep people employed; to that end, loan forgiveness will be reduced if the contractor lowered wages by more than 25 percent or failed to maintain the number of full-time-equivalent (FTE) employees during the covered period as compared to the previous period used in the loan application. There are exceptions to this rule, though.

Safe harbors for failing to maintain FTE count are:

• If the contractor can prove that government or public agency mandates prevented full operations; for example, if the region partially shut down due to a coronavirus surge, or if a job was put on hold.
• If the contractor tried to rehire furloughed employees in good faith, but the employee declined.
• If the contractor tried to fill an open position in good faith but was unable to by December 31, 2020.
• If the employee voluntarily resigned or was fired with cause, or if the employee voluntarily requested a reduction in wages or hours. Be prepared to provide documentation.

In each of these scenarios, there are caveats and more rules to consider. Check with advisors on the best course of action prior to applying for forgiveness. 

Best Practices

Throughout the covered period and beyond, contractors will need to stay organized. This can mean setting up a separate account for PPP-related transactions, keeping a manual spreadsheet, updating accounting software to accurately track expenses, or all of the above. If using a manual spreadsheet, keep separate tabs for each type of PPP expense, and within accounting software, upload supporting documentation for relevant expenses.

If a separate account is used for all PPP-related transactions, staying organized will be easier but it is still possible to run into traps. The employer’s portion of payroll taxes and mortgage principal are non-forgivable expenses and should still be paid out of the company’s operational account. It’s only necessary to transfer PPP funds at every payroll, mortgage, rent and utility payments.

It is also important to maintain communication with the lender. Even before the end of the covered period, ask for a list of documentation required for the forgiveness application. All lenders have the same guidance from the SBA, but many also have their own processes or requirements.

Frequently Asked Questions

• Are PPP funds considered to be taxable income? Loan proceeds are not taxable and should not be included in business income.
• Are certain tax deductions still available? As of this writing, certain expenses paid for with PPP funds that are later forgiven are prohibited from being deducted on federal tax returns. These types of expenses typically include the deduction for mortgage interest, rent, utility payments and the employer portions of health insurance costs and retirement contributions. The AICPA and Congress have asked for further review in this area.
• Is the forgivable loan considered to be canceled debt income? There are a few ways to record PPP loan proceeds in the financial statements though, so check with a tax advisor for guidance.
• Will PPP forgivable loans be audited? It depends. The SBA has announced it will review the loan forgiveness application for all loans $2 million and above, and that it will continue to review other forgiveness applications as necessary. In any case, it is important to keep accurate and thorough documentation in case of an audit.
• How long should PPP documents be kept? The SBA can audit PPP loans for a period of up to six years after the loan is forgiven or the maturity date is reached, whichever is later.
• Are all FTE workers’ payroll expenses covered? Not necessarily. One, workers must maintain their primary residence in the United States for payroll expenses to be forgivable. And two, remember that payroll expenses are only covered for the first $100,000 in wages. Employer-paid health insurance and retirement contributions are also covered payroll expenses and can be more than the $100,000 wage threshold, except for self-employed owner-operators. For the self-employed, health insurance and retirement contributions are not covered since they are considered part of self-employment income.

Conclusion

Construction companies that did not utilize PPP funds still have opportunities for cash savings through the CARES Act. The Employee Retention Credit, payroll tax deferrals, tax credits for qualified family or sick leave, and the expansion of net operating loss carrybacks and bonus depreciation can all be used to recoup money lost during the coronavirus pandemic. If you have questions about the information outlined above or need assistance with another PPP issue, Wilson Lewis can help. For additional information call us at 800-218-7992 or click here to contact us. We look forward to speaking with you soon.