Is PPP Loan Forgiveness a “Credit” on Federal Contracts?

April 20, 2020

On April 17th, Defense Pricing and Contracting (DPC) updated its Frequently Asked Questions. The latest Q&A on Payroll Protection Program (PPP) small business loans “somewhat” aligns with recent advice in our blog, with regards to the treatment of PPP loan forgiveness, as well as other credits.

The following is included in the updated DPC FAQ document:

Q23: 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.

A23: 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.”

I believe the answer should strike the statement “regardless if the loan is forgiven.” If the loan is not forgiven, it is debt to the company until forgiven, in accordance with Generally Accepted Accounting Principles in the United States. Debt is regularly used by federal contractors to finance allowable costs and has been acceptable under the framework of the Federal Acquisition Regulations—no different than any other SBA loan or form of credit. The contractor is not, however, able to recover the interest paid on the debt. The loan “forgiveness” creates the credit to an allowable cost, until the loan forgiveness is determined there is no benefit “accruing” to the contractor.

FAR 31.201-5 Credits reads:

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.

Once a contractor has a known event of loan forgiveness, the amount of the loan forgiveness shall result in a credit to the allowable costs.

We are getting closer to final answers; both the government and contractors are working to provide input and information for clarity into the accounting and recovery of costs during this time. We have a common mission of maintaining a “ready workforce” and continuing to support the mission of federal agencies.

For more information, contact Nicole Mitchell at 301.231.6200. For other relevant resources, visit our COVID-19 Government Contracting Resources Hub.