govcon ppp forgiveness webinar issues in focus final. 04.20 › portals › 0 › resourcemedia ›...

4/21/2020

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CARES Act & GovCon: Are PPP Loans Truly Forgivable?Bill Walter & Gary McDonald, DHG | Aron Beezley & Sarah Osborne, Bradley

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@DHG_GovCon

Please note that slides will be distributed after the webinar.

Your Presenters

Bill Walter Managing Director, [email protected]

Aron BeezleyPartner, [email protected]

Sarah OsborneAssociate, [email protected]

Gary McDonaldDirector, [email protected]

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Agenda

• Background – CARES Act

+Section 1102 – Paycheck Protection Program (PPP)

+Section 1106 – Loan Forgiveness

+Section 3610 – Federal Contractor Authority

• PPP Lessons Learned and Recap

• Comparisons: Loan vs. Forgiveness

• Forgive and Forget?

• PPP and the GovCon

• FAQs and Best Practices

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Legal Disclaimer:The information in this presentation is based upon relevant legal authority as of aspecific point in time. These authorities are subject to change or modificationretroactively and/or prospectively and such changes may affect the validity orcorrectness of this information. Additionally, the information contained within thepresentation may be tailored to a specific audience and therefore may not beapplicable to all people or all situations. This presentation does not constitute taxadvice by DHG.

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PPP – Lessons Learned and ReCap

•We anticipate rules will continue change over time

•Clarifications since the law passed:

+$100k cap applied to gross wages only and not other employer benefits

+Independent contractors – Not part of loan or forgiveness calculations because 1099 personnel can file their own PPP loans

+Salary computation – Federal taxes are excluded from loan calculation and forgiveness calculations

+75%/25% Rule - no more than 25% for non-payroll expenses

•Loan Applications began on April 2nd - $349B loaned by April 16th

•Paper trail for forgiveness appears to be substantial compared to loan application – anticipate some form of audit

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SBA PPP Statistics

• 1.6 million loans to small businesses in all 50 states - The top five: + California - $33.4 billion+ Texas - $28.4 billion+ New York - $20.3 billion+ Florida - $17.9 billion+ Illinois - $16.0 billion

• By Sector:+ Construction - 177,905 loans - $44.9 billion – 13%+ Professional, Scientific and Technical – 208,360 loans - $43.3 billion – 13%+ Manufacturing - 108,863 loans - $40.9 billion – 12%+ Healthcare - 183,542 loans - $39.9 billion – 12%+ Accommodations - 161,876 loans - $30.5 billion – 9%

• 74% of all loans were for under $150,000

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Comparison: Eligibility vs Forgiveness

Eligibility Forgiveness

Number of Employees

• Full-time

• Part-Time

• Other basis

• Full Time Equivalent (“FTE”)

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What is a Full-Time Equivalent (FTE)?

•FTEs are not defined within the CARES Act

•FTEs per historical SBA guidance:

+Person working at least 30 hours a week

+Employees working <30 hours per week can be combined to achieve a full FTE

+Compute average monthly FTE for dates required

Example: 30 full-time employees6 part-time employees144 part-time hours worked

Calculation: Full-time personnel 30

Part-time hours worked in a week 144.00 Divide by weekly hourly equivalent 30.00 4.80

FTEs per the week 34.80

FTE Calculation (1 week)

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Polling Question

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Comparison: Loan vs Forgiveness

Loan Amount Forgiveness Amount

Compensation Calculations

• Gross payroll

• Less: > $100k by employee

• Certain other adjustments

• Gross payroll

• Less: > $100k by employee

• Less: Qualified sick and family leave wages for which credit allowed under sections 7001 & 7003 of Families First Coronavirus Response Act (“FFCRA”)

• Certain other adjustments

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Comparison of Permissible and Forgivable Uses

Permissible Forgivable

Payroll Included Included

Mortgage Interest Included Included

Rent Included Included

Utilities Included Included

Other Debt Interest Included N/A

• Rent/Utilities/Loan Documents:

+ In Writing

+ Already in effect as of February 15, 2020

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How Much of the Loan is Forgiven?

• Loan forgiveness calculation:

+Cash expended (not accrued) during 8-week covered period for the following:

• Payroll (same as above)

• Interest portion of mortgage

• Rent (see below for related party rent considerations)

• Utilities (electricity, gas, water, transportation, telephone, internet)

– Mortgage, rent and utilities must be in writing and in force by Feb. 15, 2020

(Reductions may apply – see subsequent slides)

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The Loan has been received, now what?

• Cash is king, not accrued expenses

• 8 week coverage period –

+ Begins on date lender makes first disbursement of PPP loan to borrower

+ Lender must make first disbursement within ten calendar days of loan approval

• Track expenses – record keeping will be essential

• 75% / 25% test consideration

+ Per Interim Final Ruling: 75% of the loan proceeds are reserved for payroll costs

+ Most borrowers are taking this as 75% of the forgiveness must be payroll related

• Begin forgiveness calculations

+ Forgiveness may not exceed principal

+ Reductions:

• FTE Reduction

• Compensation Expense Reduction

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Loan Calculation – A quick recap

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Forgiveness Calculation – Starting Point

Sum of payments made on allowable costs during the 8-week covered period beginning on loan origination date

Payroll costs:Salary, wage, comm., vacation, sick leave, parental (capped at $100,000/EE) 625,000 Payments for provision of group health benefits, including premiums 24,000 Retirement benefits 15,000 State and local taxes on compensation of employees 8,000

Total Payroll 672,000

Interest on covered mortgage - Covered rent 140,000 Covered utilities 100,000

Total Non-payroll 240,000

Potential loan forgiven 912,000

Potential loan amount 1,250,000

Remaining loan to be repaid 338,000

PPP Loan Forgiveness Calculation

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Polling Question

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Forgiveness Reduction – Scenario 1: 75/25 split

• 75/25 requirement not in original CARES Act

• Interim Final Rule – “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs”

+Non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll

+We are hearing all kinds of questions/thoughts around how to make sure EE’s are at 75% of prior-virus compensation – would just make sure you consult with your labor attorney to make sure that what you are planning to do is not at conflict with any state/local labor and compensation laws.

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Forgiveness Reduction – Scenario 1: 75/25 split

Sum of payments made on allowable costs during the 8-week covered period beginning on loan origination date

Payroll costs:Salary, wage, comm., vacation, sick leave, parental (capped at $100,000/EE) 625,000 Payments for provision of group health benefits, including premiums 24,000 Retirement benefits 15,000 State and local taxes on compensation of employees 8,000

Total Payroll 672,000 73.7%

Interest on covered mortgage - Covered rent 140,000 Covered utilities 100,000

Total Non-payroll 240,000 26.3%


Reduction for 75% threshold for payroll costs:Loan forgiveness cap 75/25 split ($672k / 75%) 896,000 Reduction amount ($912k - $896K) (16,000)


Potential loan amount 1,250,000

Remaining loan to be repaid 354,000

PPP Loan Forgiveness Calculation

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Forgiveness Reduction – Scenario 2: FTEs

• Loan forgiveness reduced by a reduction in number of employees

+Calculation of average number of employees – average number of FTEs is determined by calculating the average number of FTEs for each pay period falling within a month

Source: US Chamber of Commerce

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Forgiveness Reduction – Scenario 3: Compensation

• Loan forgiveness reduced by a decrease of more than 25% in compensation to employees making less than $100,000 on annualized basis

• EXCLUDE: any employee who received, during ANY SINGLE PAY PERIOD during 2019, wages or salary at an annualized rate of pay > $100,000.

+ i.e. Bi-weekly payroll (26 pay cycles) – any employee that made in excess of $3,846.16 in wages/salary during a pay period in 2019 would be excluded altogether

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Restore by June 30, 2020!

•Reductions in employment or wages that occur between February 15, 2020 and April 26, 2020 (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees and/or reduction in wages.

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Polling Question

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Process for Loan Forgiveness

•Borrower completes an “application” which likely will include:+Documentation verifying the number of FTEs on payroll and pay rates for the

periods described above, including—

• Payroll tax filings reported to the Internal Revenue Service; and

• State income, payroll, and unemployment insurance filings;

+Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage, leases, and utilities;

+A certification from the borrower

• No documentation – No forgiveness!

• Lender has 60 days to provide decision on application

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PPP – Remaining Loan Terms

•Loan Terms+Deferred payment

•Payments deferred 6 months; however, interest accrues+2-year term+1.00 percent interest rate

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CARES Act § 3610 – Federal Contractor Authority

• § 3610 provides for reimbursement of certain COVID-19 related costs+ Reimbursement is discretionary, rather than mandatory;+ The parties must alter the terms of the contract to provide for reimbursement;+ Reimbursement will be at the minimum applicable contract billing rates not to exceed an

average of 40 hrs. per week for paid leave, including sick leave;+ Labor expenses reimbursed must be to retain employees (or subcontractors) in a ready

state; + Reimbursable labor expense must be due to an inability to perform work on a Federally-

approved site b/c of a closure or restriction and an inability to telework due to the nature of the job duties;

+ Reimbursable costs are limited to those incurred between Jan. 31, 2020 and Sept. 30, 2020; and

+ The contractor must offset reimbursement for such idle labor by the amount of any credits “allowed” under other sections of the CARES Act, which includes the PPP.

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DoD Class Deviation – CARES Act § 3610

• On April 8, DoD published a Class Deviation to the DFARS by issuing a cost principle governing the allowability of paid leave incurred under certain COVID-19-related circumstances.

• Class Deviation memo states, in part:

“Some contractors may receive compensation from other provisions of the CARES Act, or other COVID-19 relief scenarios, including tax credits, and contracting officers

must avoid duplication of payments. For example, the [PPP] established pursuant to . . . the CARES Act may provide, in some cases, a direct means for a small business to obtain relief. A small business contractor that is sheltering-in-place and unable to telework could use the PPP to pay its employees and then have the PPP loan forgiven, pursuant to the criteria established in the interim rule published by the [SBA]. In such a case, the small business should not seek reimbursement for the payment from DoD using the provisions of Section 3610. [emphasis added].

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DoD Class Deviation – CARES Act § 3610 (Cont’d)

• DFARS 231.205-79 (CARES Act § 3610 – Implementation) states, in part:+The maximum reimbursement authorized by section 3610 shall be reduced by

the amount of credit a contractor is allowed pursuant to div. G of the Families First Coronavirus Response Act (Pub. L. 116-127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on Jan. 31, 2020 for COVID-19.

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Implementation Guidance for § 3610 of CARES Act

• On April 9, DoD issued Implementation Guidance for § 3610 of the CARES Act, stating in part:

+ [S]ection 3610 is contingent upon the availability of funds and no adjustment to the contract or approval of a request for equitable adjustment should be made without sufficient funds. Contractors bear the burden of supporting any claimed costs, including claimed leave costs for their employees, allocated appropriately against individual contracts, with appropriate documentation and identifying credits that may reduce reimbursement.

• Other Agencies have issued guidance for Section 3610 with similar themes

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DoD Answers to Frequently Asked Questions

• On April 9, DoD published answers to FAQ about the CARES Act, stating in part:

+Q: § 3610 requires reimbursement to be reduced by the amount of credit a contractor is allowed within division G of Public Law 116–127 and any

applicable credits a contractor is allowed under the CARES Act. What about any State or local benefits that a contractor is offered and accepts?

+A: There may be available State and local programs to mitigate impacts to industry from COVID-19. Contractors should disclose any State and local reimbursement received for employee leave and should not request duplicate reimbursements from the Federal Government where other bases for relief have been accepted.

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DoD Answers to Frequently Asked Questions

• On April 17, DoD updated its FAQ, stating in part:

• Q: Please confirm that neither the FAR Credits provision, FAR 31.201-5, the credit provision in the Allowable Cost and Payment Clause, FAR 52.216- 7(h)(2), nor any other FAR or DFARS provision imposes an obligation on a contractor to credit any amount of a Payroll Protection Program (PPP) loan that is forgiven to any flexibly priced government contract or subcontract. We consider a contractor that has received a PPP loan will use the loan proceeds as it would any other funds in its corporate treasury to pay costs of doing business.

• A: We disagree that any PPP loan that has been forgiven can be treated as though it belongs to the company to use as it pleases. FAR 31.201-1, Composition of Total Cost, states that total cost is the sum of the direct and indirect costs allocable to the contract less any allocable credits. Accordingly, 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, regardless of whether the PPP loan is forgiven.

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FAQ – Can I invoice the government and get my loan forgiven?

• No PPP specific guidance issued other than Section 3610• Contracts subject to FAR Part 31 Cost Principles:

+ FAR 31.201-5 (Credits), states in relevant part:• The applicable portion of any income, rebate, allowance, or other credit relating

to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund.

• Cost principles do not apply to competitively awarded T&M or Fixed Price contracts –what might the Government do here?

+ FAR 32.601 (Contract Debts – General): + “Contract Debts” include amounts that “have been paid to a contractor to which the

contractor is not currently entitled under the terms and conditions of the contract” and “duplicate” payments.

+ Administrative set-off

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FAQ – What post-loan Gov’t actions can we expect?

• High potential for post-loan scrutiny of borrowers and lenders

• Eight express certifications for the authorized representative submitting the PPP application, e.g., that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. “

• Lessons learned from prior relief programs:

+ Statements in application

• U.S. v. Wells Fargo & Co., 943 F.3d 588 (2d Cir. 2019) (that defendant had misrepresented its financial condition to several Federal Reserve Banks to obtain emergency loans at favorable interest rates stated a claim).

+ Use of funds

• United States v. Estate of Layton P. Stuart et al, No. 1:15-cv-01044 (D.D.C. 2016) (DOJ pursued FCA settlement for misrepresentation of financial status and improper diversion of TARP funds for personal use).

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OMB Guidance Memorandum

• Issued April 10, 2020• Calls for:

+Mission achievement+Expediency+Transparency and accountability:

• Offices of Inspectors General (OIGs) should be developing plans to leverage their new surge of resources to prevent and detect waste, fraud, and abuse related to agency implementation of the relief legislation.

• Coordinate with newly created Pandemic Response Accountability Committee (PRAC)

House Committee on Oversight and Reform stated that “PRAC will be made up of independent IG who will conduct and coordinate audits and investigations to provide accountability and identify waste, fraud, and

abuse in spending under the CARES Act and the response to the coronavirus crisis.”

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Best Practices

•Deposit loan proceeds into a separate bank account (and GL account)

+Especially important if your regular operating account sweeps overnight into a common account used by multiple entities

•Use a spreadsheet or other tool to track everything and update it weekly, at a minimum

•Model different scenarios

•Retain and document the paper trail – separate shared folder on server

•Consider timing of payments – i.e. forgiveness amount includes only expenses paid during covered period (not accrued)

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Items to Gather Now

• Compensation for the following time periods:

+ By pay period by employee for 2019

+ By employee for the following:

• January 1, 2020 – March 31, 2020

• October 1, 2019 – December 31, 2019

• The 8-week time period starting with the loan funding date

• February 15, 2020 – April 26, 2020

• April 27, 2020 – June 30, 2020

• FTEs by pay period for the following dates:

+ The 8-week time period starting with the loan funding date

+ February 15, 2019 – June 30, 2019

+ January 1, 2020 – February 29, 2020

+ February 15, 2020

+ April 26, 2020

+ June 30, 2020

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Polling Question

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Questions we should be asking

• Isn’t the lender a layer of protection? Can’t I rely on them for performing acceptable due diligence?

•What happens if I get approved, receive the loan proceeds, and a portion is forgiven, but it is later determined that I was ineligible?

•How can PPP forgiveness at one of my subcontractors impact my prime contract?

•What if my rent payments are to an entity under common control?

•Can I use loan proceeds to pay interest on a mortgage if interest is an unallowable cost?

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Questions?

[email protected]

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Thank You!

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About DHG Government Contracting AdvisoryDHG has an extensive Government Contracting Advisory practice comprised of former DCAA auditors with many years of DCAAaudit experience, as well as other professionals with significant experience in government contracts. As a result, our industryfocused professionals provide advice to our clients in all aspects of finance, accounting and compliance associated withgovernment contracting. Our team delivers comprehensive regulatory compliance solutions to a broad range of contractors fromthe largest to the smallest. You will find an effective combination of expertise from these practice areas as permitted byindependence standards.

Praxity AISBL is a global alliance of independent firms. Organized as an international not-for-profit entity under Belgium law, Praxity has its executive office in Epsom. Praxity – Global Alliance Limited is a not-for-profit company registered in England and Wales, limited by guarantee, and has its registered office in England. As an Alliance, Praxity does not practice the profession of public accountancy or provide audit, tax,consulting or other professional services of any type to third parties. The Alliance does not constitute a joint venture, partnership or network between participating firms. Because the Alliance firms are independent,Praxity does not guarantee the services or the quality of services provided by participating firms.

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Polling Question

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