Message from Beth -- December 16, 2020
At the ACEC Ohio Board of Directors meeting last week, the board held a discussion with Katharine Mottley and Matt Reiffer from ACEC on the two issues that impact member firms as well as many small businesses who have taken PPP loans. The two issues are:
1. The deductibility of the underlying expenses for income tax purposes, and
2. The treatment and impacts on a consultant’s overhead rate.
The CARES Act included language explicitly stating that any portion of a PPP loan that qualified for loan forgiveness “shall be excluded from gross income” for tax purposes. Under current guidance from IRS in Notice 2020-32 (recently re-affirmed by Revenue Ruling 2020-27), the expenses that are paid by the forgiven funds are not deductible for tax purposes. This in essence makes the forgiven loan taxable income to the firm. While there is still benefit to the forgiven loan, it is much less than what was originally intended within the Act. This is not only a problem for Engineering firms, but for every small business that received a PPP loan.
Legislation is pending in the House and Senate to overturn the IRS decision and ensure the deductibility of covered expenses. ACEC is actively participating in a broad coalition of groups to support the change with hopes this will be included in the final agreement on a stimulus bill this week. ACEC Ohio has contacted the Ohio Congressional Delegation supporting this change also.
In addition, a provision of the Federal Acquisition Regulation (FAR) for government contractors could further negate any benefit from the PPP loan. The FAR credits clause (FAR 31.201-5) could require a firm contracting with the government to calculate a credit to their indirect costs for the allocable portion of the forgiven PPP loan. The firm would be billing at a much lower rate the following year – and potentially in subsequent years, in the case of multi-year contracts. The overhead rate implications are specific to government contractors but have the potential for a much more profound impact on these small businesses. FAR 31.201-5 states:
Unfortunately, there is no authoritative guidance on the practical application of this section for non-Federal agencies. Instead, many within the industry are inserting opinion to stipulate that ALL of the forgiven funds should be credited to a firm’s overhead no matter what those funds were actually spent on (direct labor, indirect labor, rent, utilities, and interest).
ACEC is seeking clarification that the FAR credits clause does not apply to forgiven PPP loans, working with the FHWA and AASHTO. ACEC Ohio has also scheduled a meeting with the Ohio Department of Transportation to educate the agency on this issue. We have also sent information to Ohio Congressional members that sit on the Committee on Small Business in the US House.
As always, feel free to contact me with questions and I wish you a safe and joyous holiday season!