![]() Let’s assume the same facts as the example above, but that the company was able to allocate $250,000 of the forgiveness to direct labor costs on commercial or non-FAR contracts, and the remaining $50,000 was applied to a combination of indirect labor and rent expense. Thereafter, forgiveness could be applied to unallowable indirect costs before being applied to allowable indirect costs. You may be able to soften the application of loan forgiveness credit by applying the forgiven portion of a PPP loan to direct labor on commercial contracts (so long as the loan proceeds were actually spent in such manner). As a result, a multi-year contract signed at a time when the overhead rate is reduced will likely diminish the firm’s revenue for the duration of that contract. ![]() Keep in mind that any reduction in the overhead rate will be held in place for the length of a contract. The loan forgiveness would most likely reduce the allowable overhead expenses to $1,200,000, causing the overhead rate to drop to 120%. Now let’s assume the company had a $300,000 PPP loan forgiven. ![]() Let’s assume that before accounting for the forgiveness, the company’s direct labor is $1,000,000 and their allowable overhead expenses are $1,500,000, leading to an overhead rate of 150%. Here’s a simple example: A company calculates their overhead rate using direct labor as the base. Firms with a higher percentage of government work may even find themselves “paying back” a portion of the actual loan forgiveness through reduced overhead rates. The potential reduction in the FAR overhead rate in the year the loan forgiveness is recorded as income could be significant, depending on the balance of a firm’s government vs. This credit against overhead costs will have the effect of lowering the allowable overhead rate, which will have a negative impact on revenue realized from future contracts. Depending on the accounting policy chosen to account for the forgiveness, this could either be in the year the PPP loan proceeds were used or the year in which the loan is forgiven. The credit must be applied in the year in which the loan forgiveness is recorded as income. If you received a PPP loan that was forgiven – or are considering applying for loan forgiveness – it is important to understand how that loan forgiveness will impact your overhead rate.Ĭurrent FAR regulations ( FAR 31.201-5) require that any portion of a PPP loan that has been forgiven must be credited back to the government in the form of a credit that reduces the indirect cost calculation used to determine a firm’s overhead rate. Architects, engineers and construction companies that work under federal contracts and received a Paycheck Protection Program (PPP) loan face a dilemma when performing their annual overhead rate calculation.
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