Construction Companies Access CARES Act for Economic Relief | COVID-19 | DMJ & Co., PLLC

The construction industry has seen the impact of the coronavirus crisis play out through increased health and safety concerns, canceled projects, and job losses. With geographic regions and parts of the U.S. economy experiencing rolling partial shutdowns, construction companies are struggling to find new projects and keep workers employed. Costs are higher due to new safety protocols requiring additional equipment and new work procedures.

Many contractors have sought financial relief to pay employees and meet overhead costs during the pandemic through two federal programs included in the Coronavirus Aid, Relief and Economic Security Act (CARES Act). These relief programs are the Paycheck Protection Program (PPP) and the Main Street Lending Program (MSLP).

Loan Forgiveness Available Under the Paycheck Protection Program

Under the PPP, the Small Business Administration (SBA) offers forgivable loans to businesses to cover payroll, overhead costs, and other eligible business expenses for up to 24 weeks. However, subsequent refinements to the PPP program create some uncertainty and challenges to construction companies. For example, some contractors applied for the loan, provided required certifications, and after obtaining the funds, learned that loans in excess of $2 million would be subject to an SBA audit, which could entail requests for additional certifications to support the company’s overall financial position and liquidity needs. This change has sent some contractors scrambling to repay their loans despite their financial need, while others are waiting to see what additional documentation will be requested in an audit.

Construction companies are obtaining some assistance from surety and bonding companies. They are providing guidance to their clients on the surety’s ability to extend surety credit as well as reliance on their clients’ ability to retain ratios for profitability, equity, working capital, cash flows, and overall leverage. If selected for an SBA audit, contractors may be called upon to provide this guidance and to document funding slowdowns, project shutdowns, and other obstacles they are encountering.

Loan forgiveness is the highlight of the PPP. The main goal of the PPP program was to protect employment by enabling contractors to recall employees who were laid off or furloughed. Contractors are allowed to use PPP funds for eligible expenses during the covered period and then apply to their bank for forgiveness of eligible expenses up to the loan amount. Companies must meet the full-time equivalent thresholds within the PPP loan forgiveness provisions for the covered period.

Recent updates to the PPP forgiveness provisions extended the covered period from eight weeks to 24 weeks and extended the time period in which a company could file a loan forgiveness application with its bank. The extended time period provides additional relief to many contractors that were facing project shutdowns and thus unable to spend all of their PPP funds. Other items and requirements of the provisions will require attention to detail to maximize loan forgiveness.

Many contractors are applying for loan forgiveness during their 2020 fiscal year to avoid having a loan on their financial statements. However, it will be challenging for construction companies to manage the tax consequences and financial statement impact of loan forgiveness, as what started out as a “tax-free” forgivable loan has been altered to become non-deductible or, essentially, taxable.

Main Street Lending Program Fills Gap

Small and mid-sized businesses have access to new loans or increases to their existing loans through the $600 billion funding that MSLP provides. The program is geared to businesses that may have been too large to receive a PPP grant and too small to qualify for the Federal Reserve’s corporate credit facilities.

The MSLP offers three separate borrowing facilities with different eligibility requirements and loan terms, based mainly on a multiple of earnings before interest, taxes, and depreciation (EBITDA). MSLP loans are not forgivable, but they do offer favorable terms, including deferred payments and extensions with manageable interest rates. The MSLP does not require a company to maintain certain employment levels and borrowers must provide required certifications. The program has seen a slow launch and some contractors are having difficulty finding banks willing to extend MSLP credit.

Adapting to the Changing World of Work

With the health and welfare of all employees in mind, construction companies need to determine what safety procedures should be required in the everyday work environment. New safety procedures and equipment related to COVID-19 at the job site must be factored into the bidding process and on change orders. Future work orders should be reviewed to ensure that any changes to the current backlog are accounted for immediately and new opportunities can be pursued. Some employees now are able to work from home and management should determine what procedures and processes should be adjusted to ensure proper controls are in place. Management should stay in touch with their team of advisors—bankers, bond companies, accountants, and lawyers— for guidance and assistance as new challenges arise.

David Mize, CPA
David Mize, CPA

David Mize is a Tax Manager in DMJ's Greensboro office. David is well versed in flow-through taxation, with specific expertise in real estate partnerships.

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