accounting services - audit, tax and consulting | aronson llc - … · 2020. 5. 7. · the far is...

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COVID-19 Legislation: How Is It

Impacting Federal Contractors? (Part 1)

Nicole Mitchell, Bill Foote, and Mike Muscatello | May 7, 2020

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Your Instructors for This Webinar

Use the Q&A panel to ask questions during the

webinar at any time.

Nicole Mitchell

Partner, Government Contract Services Group

Bill Foote

Partner, Forensic & Valuation and Transaction Advisory Services

Mike Muscatello



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Agenda

FAR Framework

FFCRA

PPP

Conclusion and Q&A



By the end of this webinar, you will be able to:

• Discuss why and how you should reduce costs

for payroll tax credits and loan forgiveness.

• Give examples on how payroll tax credits and

loan forgiveness affects rates and costs on

federal contracts.

Learning Objectives


FAR Framework


Federal Acquisition Regulations (FAR)

The FAR is the primary regulation for use by all executive agencies in their acquisition of supplies

and services with appropriated funds. The FAR is codified at Chapter One of Title 48 of Code of

Federal Regulations, 48 C.F.R. 1.

FAR 1.102 Statement of guiding principles for Federal Acquisition System’s vision:

• Deliver on a timely basis the best value product or service to customer, while maintaining

public’s trust and fulfilling public policy objectives.

Federal Acquisition System:

• Satisfies the customer in terms of cost, quality, and timeliness of delivered product or service.

• Minimizes administrative operating costs.

• Conducts business with integrity, fairness, and openness.

• Fulfills public policy objectives.


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Part 31.000 Scope of Part, Contract Cost Principles, and Procedures

This part contains cost principles and

procedures for:

• Pricing of contracts, subcontracts, and

modifications to contracts and

subcontracts whenever cost analysis is

performed. Refer to 15.404-1(c).

Contracting by Negotiation:

• The determination, negotiation, or

allowance of costs when required by a

contract clause.



31.201-1 Composition of Total Cost

Total cost of

contract

Any allocable

credits

Any allocable cost

of money

Direct and indirect

costs allocable to

contract, incurred or

to be incurred



FAR 31.201-2 Determining Allowability

A contractor is responsible for accounting

costs appropriately and for maintaining

records—including supporting

documentation—adequate to demonstrate

that costs claimed:

• Have been incurred.

• Are allocable to contract.

• Comply with applicable cost principles in

this subpart and agency supplements.

The contracting officer may disallow all or

part of a claimed cost that is inadequately

supported.



FAR 31.201-5 Credits

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.



Summary of FAR Cost Principles

Part 31 Governs

• Pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed.

• Determination, negotiation, or allowance of costs when required by a contract clause.

Defines Total Costs on Contracts

Direct and indirect costs allocable to the contract, incurred or to be incurred

Any allocable cost of money pursuant

Any allocable credits

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.


Families First Coronavirus Response Act (FFCRA)


Businesses with fewer than 500 employees can

claim refundable payroll credits based on

qualifying paid leave, family and medical leave

or sick leave, that they provide through Dec. 31.

This emergency sick leave does not replace any

other sick leave offered by a company and will

expire after December 31, 2020.

The government will utilize tax credits to

reimburse businesses for paid sick leave granted,

as a result of FFCRA. The FFCRA will expire on

December 31, 2020.

About FFCRA



Accounting

Emergency sick leave is distinct from employer’s normal PTO and will ultimately lead to tax

credits and changes in rates. Therefore, it needs to be accounted for separately.

• Establish at least four new pay codes in your system to track hours.

• Instruct your employees to record their time to appropriate charge code on their timesheet to

facilitate correct calculation of their pay and your documentation.

Pay Type Pay Code For Purpose

Sick Leave FFCRA-Sick-EE Employee Subject to a quarantine or isolation order.

Advised by a health provider to self-quarantine.

Experiencing coronavirus symptoms and is seeking a medical

diagnosis.

FFCRA-Sick-FM Family member Caring for someone with coronavirus.

Caring for a child because child’s school or childcare facility is closed.

EFMLEA EFMLEA-N Family member No pay for first 10 days or 80 hours.

EFMLEA-Y Paid leave for up to 400 hours, subject to pay cap and used FMLA.









or by cash refund.



Example 1 Provided by IR 2020-57

$8,000 in payroll taxes,

including taxes withheld

from employees.

$5,000 in sick

leave to make

qualified leave

payments.

$3,000 on its next

regular deposit

date for taxes.



Federal Contractor’s Fringe Rate Based on IR 2020-57

Fringe if employee had not used leave Fringe if employee uses leave and it is fully recovered

Fringe Costs Leave Used Tax Credit* Fringe Costs

Fringe Pool (total

benefits offered to all

employees statutory

and discretionary)

$32,000 $5,000 ($5,000) $32,000

Fringe Base Fringe Base

Fringe Base (total labor,

less fringe labor)

$100,000 ($5,000) $95,000

Fringe Rate 32.00% 33.68%

*Debit to cash or a reduction to cash used



FFCRA Leave Paid to SCLS; SCA-Covered Employees

FFCRA leave payments may also trigger a requirement for health and welfare (H&W)

benefits for SCA-covered employees.

If wage determination (WD) incorporated into a contract is odd-numbered, this requires H&W on all hours paid.

If WD incorporated into a contract is even-numbered, this requires H&W onall hours worked (excluding sick leave).H

&W

ben

efits

are

requ

ired

H&

W benefits are n

ot required



Practical Tips

Ensure sufficient level of documentation to

support leave cost and type of leave taken

(qualification). Federal contractors require

certifications from employees and retain

these certifications for audits of federal

contracts.

Track leave in detail, follow general

accounting instructions, and establish four

new leave accounts.

• Account for credits separately as a contra

account in fringe pool, as a fifth account.

Monitor H&W requirements for SCLS (SCA)

contracts.

Ensure to include credit as a reduction of

fringe costs claimed on federal contracts.

Monitor impact of leave cost and credit

application impacts on indirect rates.

Adjust provisional billing rates when there is

a known material change for period.


Paycheck Protection Program (PPP)


PPP Notable Dates

13 March

COVID-19 Emergency Declaration

18 March

President Trump signs Families First Coronavirus Response Act

27 March

President Trump signs Coronavirus Aid, Relief, and Economic Security Act

2 April

SBA releases first Interim Final Rule addressing PPP

3 April

Lenders begin accepting PPP loan applications

16 April

PPP funds exhausted

24 April

President Trump signs Paycheck Protection Program and Health Care Enhancement Act

27 April

PPP funding resumes

14 May

Safe harbor deadline for returning PPP funds



PPP Maximum Loan Amount – Steps

• Step 1: Compute 2019 payroll costs by adding the following:

– 2019 adjusted gross wages*

– 2019 employer health insurance contributions

– 2019 employer retirement contributions

– 2019 employer state and local taxes assessed on employee compensation

• Step 2: Calculate average monthly payroll costs

• Step 3: Multiply average monthly payroll costs by 2.5

• Step 4: Adjust for outstanding EIDL loans, if applicable

* Note: In arriving at adjusted gross wages the following should be subtracted: (i) any amounts paid to any individual employee in excess

of $100,000 and (ii) any amounts paid to any employee whose principal place of residence is outside the U.S.



PPP Maximum Loan Amount – Illustration

2019 reported gross wages 4,700,000$

Less: adjustment for $100,000 cap (340,000)$

Less: adjustment for principal place of residence -$

2019 adjusted gross wages 4,360,000$

2019 ER health insurance contributions 250,000$

2019 ER retirement contributions 175,000$

2019 ER SUI 15,000$

2019 payroll costs 4,800,000$

Step 2 Average monthly payroll costs 400,000$

Step 3 Average monthly payroll costs times 2.5 1,000,000$

Step 4 Adjustment for outstanding EIDL loans -$

Maximum loan amount 1,000,000$

Step 1



PPP Loan Forgiveness

• Up to 100% of a PPP loan may be forgiven if required conditions are met

• Loan forgiveness is based on the total amount spent by a borrower on forgivable costs

during the eight-week period following the first disbursement of the PPP loan

• Forgivable costs include specified payroll costs and non-payroll costs

– Payroll costs: gross salaries subject to $100,000 annualized cap, employer health insurance

contributions, employer retirement contributions, employer state and local taxes assessed on

employee compensation

– Non-payroll costs: rent, utilities, mortgage interest

• Forgiveness requests are to be submitted to the lender that is servicing the loan

• Lenders will make decisions on loan forgiveness within 60 days of receipt of the application

• PPP loan forgiveness will not be treated as taxable income to borrowers … but according to

IRS Notice 2020-32 the associated forgivable costs will not be tax deductible



Potential Limitations on Forgiveness

• General requirement that 75% of loan proceeds be used for payroll costs

• Not more than 25% of loan forgiveness may be attributable to non-payroll costs

• PPP loan forgiveness may be reduced:

– If employee headcount levels are not maintained (based on comparison of average number of

FTEs per month for specified periods)

– To the extent individual salaries decrease by more than 25% during specified periods (applies only

to employees compensated at an annualized rate of less than $100,000)

– But … borrowers can restore any reduction in FTEs or salaries that occurred between 2/15/20

and 4/26/20 if they do it by 6/30/20



PPP Financial Reporting Considerations

PPP loan: interest-bearing debt unless and

until forgiven.

Any portion not forgiven remains interest-

bearing debt until repaid.

Presentation of PPP loan forgiveness:

• Revenue?

• Reduction to applicable expenses?

• Other income (below the line)?

Not-for-profit entities: guidance is clear

(contributions revenue).

For-profit entities: guidance is not as clear:

• PPP loan forgiveness may be analogous

to a government grant (no explicit

guidance in US GAAP).

• In the absence of US GAAP, may look to:

– IAS 20 Government Grants.

– ASC 958 Contribution Accounting.



PPP Loan Forgiveness for Federal Contractors

As the famous saying goes: Buyer, or in this case, borrower beware.

• There are very few things that come to federal contractors no strings attached and the

PPP is no different.

• It is not PPP that is treating federal contractors differently, but rather contracts terms and

conditions that were agreed to with federal government have provision to receive credits

associated with allowable costs.

While loan forgiveness is not explicitly stated as payment the government shall receive from a

contractor, DoD guidance explicitly states loan forgiveness IS interpreted as a credit due back

to the government on federal contracts in accordance with the FAR.









or by cash refund.



Loan Forgiveness Example for a Federal Contractor

Example assumes a $1,000,000 loan received and 100% forgiven: $900,000 used for payroll

costs and $100,000 used for rent.

• $900,000 for payroll costs: $850,000 in labor, and $50,000 for fringe benefits (health

insurance). $850,000 labor cost as follows:

– $500,000 was attributed to direct labor.

– $200,000 and $150,000 to overhead and G&A labor, respectively.

• $100,000 of proceed were used for rent for facilities that were charged to G&A during this

period due to 100% telework.

Typically, the contractor has $5,000,000 in payroll costs of which 10% is typically fringe labor

(leave and holiday) with a fringe labor base of $4,500,000.



Impact on Indirect Rates

Loan Proceed Used For Amount

Direct Labor ($500,000)

Direct Labor Health Insurance ($30,000)

Overhead Labor ($200,000)

G&A Labor ($150,000)

Indirect Labor Health Insurance ($20,000)

Rent (G&A Cost) ($100,000)

Total Loan Proceeds ($1,000,000)

Impacts on Indirect Rates Amount

Total Health Insurance ($50,000)

Total Labor ($850,000)

Other Costs (Rent) ($100,000)

Total ($1,000,000)



Fringe Rate

Fringe Pool Expenses Loan Net

Leave (Holiday and PTO) $500,000 $500,000

Statutory Fringe (FIA,

FUTA, SUTA, and WC)

$500,000 $500,000

Health Benefits $225,000 ($50,000) $175,000

Employer 401(k) Match $125,000 $125,000

Fringe Pool $1,350,000 ($50,000) $1,300,000

Fringe Base $4,500,000 ($850,000) $3,650,000




Overhead Rate Overhead Pool Expenses Loan Net

Overhead Labor $700,000 ($200,000) $500,000

Fringe on Overhead Labor $210,000 $178,082

Other Overhead Cost $250,000 $250,000

Overhead Pool $1,160,000 ($200,000) $928,082

Direct Labor $3,500,000 ($500,000) $3,000,000

Fringe on Direct Labor $1,050,000 $1,068,493

Overhead Base $4,550,000 ($500,000) $4,068,493

Overhead Rate 25.49% 22.81%



G&A RateExpenses Loan Net

G&A Labor $300,000 ($150,000) $150,000

Fringe on Labor $90,000 $53,425

Other G&A Costs $400,000 ($100,000) $300,000

General and Administration Pool $790,000 ($250,000) $503,425

Direct Labor $3,500,000 ($500,000) $3,000,000


ODC $250,000 $250,000

Overhead Labor $700,000 ($200,000) $500,000

Fringe on Overhead Labor $210,000 $178,082

Overhead Costs $250,000 $250,000

General and Administrative Base $5,960,000 ($700,000) $5,246,575

G&A Rate 13.26% 9.6%



Indirect Rate Proof

Total costs reduced by $1,000,000

Direct Labor $3,500,000 $3,000,000



Overhead Base $4,550,000 $4,068,493

Overhead Rate 25.49% 22.81%

Overhead Pool $1,160,000 $928,082

G&A $5,710,000 $4,996,575

ODC $250,000 $250,000

G&A Base $5,960,000 $5,246,575

G&A Rate 13.26% 9.6%

G&A Pool $790,000 $503,425

Total Cost $6,750,000 $5,750,000

Account or

Rate

Increases or Decreases

Direct Labor Decreases

Fringe Rate Increases

Overhead Rate Decreases

G&A Rate Decreases

Bottom Line Decreases for amount of loan

forgiveness



Potential Impacts on Billings Upon Loan Forgiveness

Cost

Reimbursable (99.9% Confidence)

Time and

Materials (60% Confidence)

Firm Fixed

Price (90% Confidence)

True up on direct

and indirect

necessary.

Final true up of

all costs through

ICS.

True up of LH is

unknown.

True up of

material is

necessary.

No billing true

up if FFP not

based on cost

incurred.

No true up on

FFP exempt

from CAS.



Practical Tips

Ensure meticulous documentation in your accounting records to support the use of the loan proceeds not only for forgiveness but also to appropriately apply credits for forgiveness.

• If possible, track loan proceeds in a separate account.

Communicate with the contracting officer about credits on billings when loan forgiveness is received.

Adjust billings based on type of contract

Legally keep three sets of books: GAAP, tax, and FAR.

Document facts and circumstances surrounding loan and forgiveness as well as treatment on contracts.

Monitor the impact to indirect rates.

• Adjust provisional billing rates when there is a known material change for period.

Engage an expert for assistance in preparing the 2020 Incurred Cost Submission, if the submission is required on your contract.


Conclusion and Q&A


Let Us Know How We Can Help!

• Debt restructuring

• PPP loan forgiveness and accounting

considerations

• NOL carryback analysis

• Forecasts and scenario analysis

• Business interruption claims

• Distressed M&A due diligence

• Impairment analyses



Who to Contact with Questions

Nicole Mitchell


[email protected]

301.222.8231

Bill Foote

Partner, Forensic & Valuation and Transaction Advisory Services

[email protected]

301.231.6299

Mike Muscatello


[email protected]

301.231.6277


mailto:[email protected]




Upcoming Webinars

More are coming as well:

• Part 2 of this series will focus on Section

3610 of the CARES Act for government

contractors.

Stay tuned for more information.


accounting services - audit, tax and consulting | aronson llc - … · 2020. 5. 7. · the far is...

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