The Impact of PPP Loan Forgiveness on Indirect Rates

  • 9/1/2020
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As a government contractor, the impacts of PPP loan forgiveness are complex. Carefully analyze your options before deciding if loan forgiveness is best for your business.

Key insights

  • The decision to move forward with PPP loan forgiveness may not be easy.
  • Analyze the possible scenarios specific to your business operations.
  • CLA can help you navigate the forgiveness process.

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The decision to move forward with Paycheck Protection Program (PPP) loan forgiveness seems like an easy one, but for government contractors it’s rarely that easy. In your realm, additional oversight and regulations are common. A decision to move forward with forgiveness has both current and future potential impacts.

PPP is no ordinary loan for government contractors

Due to the forgiveness component, any costs funded by forgiven loan proceeds are essentially a credit received by the company, and one the government expects its contractors to pass on to them.

In an updated FAQ document released on August 17, 2020, the Department of Defense clearly stated that, “to the extent that PPP credits are allocable to costs allowed under a contract, the Government should receive a credit or a reduction in billing for any PPP loans or loan payments that are forgiven.”

This credit or reduction in billing is outlined in the Federal Acquisition Regulation (FAR) — specifically the Credits provision (FAR 31.201-5) and the credit provision in the Allowable Cost and Payment clause (FAR 52.216-7(h)(2)). This billing requirement has a direct impact on contractors with flexibly priced contracts: affecting the contractor’s direct costs or the contractor’s indirect costs allocated across contracts.

If PPP loan proceeds are forgiven, contractors should also expect to see a reduction in the calculation of indirect rates because labor is likely both a significant portion of the rate structure as well as a significant portion of the costs funded by the forgiven loan proceeds. On a go-forward basis, this has the potential to result in prime contractors performing future work at lower rates.

Is PPP loan forgiveness the answer?

Consider the factors above and the impact that loan forgiveness will have on your business. Perform a cost benefit analysis on the overall impact to your business in each scenario: applying for PPP forgiveness vs. paying the PPP loan back. In this analysis, consider the low interest rate of the loan, the impact that forgiveness will have on your indirect rates, the volume of federally funded work typically performed and flexibly priced using the indirect rates, and the length of time the rates will be applied.

Also, consider the IRS position that no deduction is allowed under the Internal Revenue Code for a payment that is otherwise deductible if the payment of the expense results in the forgiveness of a covered loan. The inability to deduct these expenses, which effectively makes the loan forgiveness taxable, coupled with the credit applied to indirect rates, leaves a real possibility that companies could be left in a less advantageous position by having the loan forgiven than they would be had they not taken a PPP loan at all.

Carefully analyze your options before deciding if loan forgiveness is best for your business, and then determine an appropriate course of action.

How we can help

CLA has deep experience serving government contractors. We can help you understand the pros and cons of PPP loan forgiveness.

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