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Navigating PPP Loans in the Construction Industry: Potential Forgiveness and Potential Abuse

Construction companies in particular are feeling the impact of COVID-19. Many companies are experiencing job start delays, postponement or cancellation of projects, or are unable to properly perform work on certain projects due to the safety guidelines that must be adhered to at this time on all job sites. In hopes to relieve small businesses affected by the pandemic one form of relief that is being provided is through the SBA Payroll Protection Plan (“PPP”) loans.

Once a company is successful in obtaining a PPP loan the most important step is to then to maintain accurate books and records of how the loan funding is used. The PPP loan is for qualifying expenses and qualifying expenses only. In obtaining maximum forgiveness and ensuring that the funds were used properly it is crucial to make sure there is a proper audit trail of the expenses the funds were used on. It is recommended that once funds are received to create a separate bank account to keep the funds separate from everything else. Then any time a qualifying expense is paid it can then be made through this account helping to track the use of the funds.

90 days after the loan origination is where applying for loan forgiveness begins. The objective of the PPP loan is to cover payroll costs and to support ongoing operations. The amount forgiven will depend on the amount spent, how it was spent as well as how staffing and compensation levels were maintained during the eight week “covered period” after loan origination. Qualifying expenses include certain payroll costs as well as interest on covered mortgages incurred before February 15, 2020, rent under lease agreements that existed before February 15, 2020 and utilities (electric, gas, water, transportation, telephone and internet) under service agreements that existed before February 15, 2020. It should be noted that not all payroll costs are considered a qualifying expense. Payroll costs excluded include costs such as, total salary/wages for any employee(s) in excess of $100,000, any employee whose principal place of residence is outside the U.S and qualified sick or family leave for which a credit is allowed under FFCRA. Loan forgiveness will be reduced for any non-qualified expenses and to the extent used for qualified non-payroll costs in excess of 25%. This means at least 75% of the proceeds must be used for payroll costs for maximum forgiveness. In addition during the 8 week covered period the average number of full time employees cannot be less than the average number of full time employees during the lookback period or forgiveness will be reduced. Then if salaries and wages are reduced by more than 25% for any employee that made less than $100,000 annually during the eight week covered period as compared to their most recent full quarter there will be a reduction in forgiveness. However, the ACT includes re-hire provisions which allow companies to restore their staffing of full-time equivalents (FTE’s) to prior levels in order to eliminate reductions of forgiveness due to a reduction in FTE headcount. 

It is likely most companies will receive some level of forgiveness. At this time it is possible to calculate an estimate on the potential amount to be forgiven. However, it is just an estimate. Until further guidance is provided and the forgiveness process begins it is hard to know for certain if a PPP loan received will be fully forgiven and thus treated as a grant. As such for interim financial reporting it is recommended the loan be treated just as other loans would be and should be considered debt. The portion of the loan not forgiven is due in 2 years from issuance accruing interest at 1% per annum. Interest and principal payments are deferred for a 6-month period from the date of the loan, but interest will accrue during the deferment period. It is recommended if there are any unused funds at the end of the 8-week period for Companies to continue to use the funds but to make sure they continue to only be used for qualifying expenses.

Some companies may potentially abuse the PPP loan by accepting the loan using incorrect information to obtain the funding when it wasn’t needed and to use the funds for purposes other than payroll or qualifying expenses, such as to buy property and equipment. There is also potential for abuse during the forgiveness process. Companies might inflate payroll or staffing level figures to receive more forgiveness than they  should. Companies should also be careful not to comingle funds or take credit for the same expenses if they also received other funding such as the Economic Injury Disaster Loan (“EDIL”) that is used for similar expenses.

The PPP loan should not be looked at as free money. Companies need to make sure they make accurate and truthful representations for obtaining the loan, uses of the loan and factors that play into forgiveness of the loan. Tracking funds properly and carefully is crucial. Any misuse and companies could be exposing themselves as perpetrating fraud.

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