April 23, 2020 Editor’s Note: Thank you for viewing this resource about the Paycheck Protection Program (PPP). This was a cornerstone for many organizations during the COVID-19 pandemic, but it’s important to stay current on the latest financial support options. Like PPP, the Employee Retention Credit (ERC) can be leveraged to bring your business significant financial relief. We invite you to dive into our ERC content here. Need professional advice on maximizing your ERC benefits? Learn more about our Employee Retention Credit consulting services and then contact us. There are constant changes happening as the US responds to various employer needs during the COVID-19 pandemic. This includes the new Emergency Paid Sick Leave and Emergency Family and Medical Leave Expansion Acts as well as potential reimbursement for government contractors under Section 3610 of the CARES Act and the two rounds of funding of the Paycheck Protection Program of the CARES Act. While there are not specific rules on how to track these costs for government contractors, there are recommendations that can be put into place. Families First Coronavirus Response Act – On April 1, 2020, the US Department of Labor put into place the Emergency Paid Sick Leave and Emergency Family and Medical Leave Expansion Acts. These include various paid leave for employees based on certain criteria related to COVID-19. For further details on these acts please visit our KatzAbosch COVID-19 resource page. For general ledger tracking purposes, it is recommended that you set up fringe accounts for each of these acts in order to easily track and substantiate these costs. Since there are various levels of paid leave, dependent on the facts and circumstances, we advise you to set up a separate fringe accounts for each type of leave. Section 3610 – On April 8, 2020, the Department of Defense released a class deviation which implemented Section 3610 of the CARES Act. This also included a new clause in the Defense Federal Acquisition Regulation Supplement (DFARS). The class deviation provides relief for contractors to stay in a ready state by treating paid leave costs that are being incurred to keep its employees in a ready state due to the COVID-19 national emergency, as allowable. You can find more detail on this topic from our previous article, Class Deviation – CARES Act Section 3610 Implementation Clarified by clicking here. However, regarding how to track these costs, it has been recommended by the Defense Pricing and Contracting Office that the paid leave costs be recorded under “Other Direct Costs (ODC) COVID-19. These costs will then be allocated amongst the affected contracts based on “some reasonable, agreed upon allocation.” There has also been discussion that it may be appropriate in certain situations to have these costs charged to indirect cost pools. It is important to discuss your options with your contracting officer or prime to determine how the costs will be charged. Also keeping in mind, that as of right now, only time from March 27, 2020 and forward is being reimbursed under Section 3610. It is expected that further guidance will be coming soon. Payroll Protection Program (PPP) – Beginning on April 3, 2020, The U.S. Small Business Administration, began processing the $349 billion earmarked for the Paycheck Protection Program (PPP) under the CARES Act. As many businesses, including government contractors, await approval and receipt of funds from the PPP including funding for the potential second wave, they should be thinking about how to track their costs in order to comply with the requirements of the Act. 1. Opening a separate bank account for PPP proceeds is not required but may be useful. It is critical that the proceeds of the loan be used only for items explicitly authorized in the Act and subsequent U.S. Treasury-issued guidance, including payroll costs, rent, mortgage interest, utilities, and other interest on pre-February 15, 2020 indebtedness. Depositing PPP loan proceeds into an exclusive bank account, then transferring amounts to the company’s operating account as needed for authorized items can help monitor the balance of funds remaining and avoid commingling with other company funds. 2. Create a spreadsheet tracking the funds as used during the 8-week period following receipt of the loan proceeds. Details tracked in this spreadsheet should include the payee, authorized category for use of the funds, date paid, amount paid, and the balance of unused funds (with regular reconciliation to the exclusive bank account, if used). Monitoring the percentage of payroll-related costs to total costs is important, as 75% of funds used must be used for payroll costs in order to maximize the forgiveness amount of the loan. Remember to subtract salary amounts in excess of $8,333 per month ($100,000/year) per person during the 8-week covered period, as those amounts are not covered under the loan. It is extremely important that all PPP loan recipients create an auditable trail for the use of PPP funds received, as they will be required to account for such usage to their bank following the 8-week covered period of the loan. They will also need to show that they were not reimbursed under FFCRA or Section 3610 for the funds that are requested to be forgiven. While we await additional guidance on the loan forgiveness provisions, we do not recommend assuming the use of funds for any purpose other than those described in #1 above will simply result in a reduction of the forgiven amount. Guidance issued by the Treasury Department on April 2, 2020, states, “If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.” 3. Companies must track the average number of FTE’s during the 8-week covered period following the receipt of the loan. This number will be compared to the average FTE’s during the period of either January 1, 2020 to February 29, 2020, or February 15, 2019 to June 30, 2019 (at the discretion of the borrower) as part of the loan forgiveness calculation. The amount of forgiveness will be reduced in proportion to any reduction in FTE’s and will be further reduced by reductions in pay in excess of 25% for any employees during the 8-week period. 4. Government contractors should also create charge codes for employees to post their time during which they were precluded from working on a contract, but required to remain “in a ready state” under Section 3610 of the CARES Act, as discussed above. In addition, we recommend creating charge codes for paid leave under the new Families First Coronavirus Response Act (FFCRA) for both categories of leave covered – Employee Quarantine/Symptoms and Care for Others related to Covid-19 Finally, government contractors should be aware that any funds received under the paycheck protection program may ultimately be considered “credits” under FAR 52.216-7(h)(2), which requires contractors to reimburse the Government for any “refunds, rebates, credits, or other amounts” received, to the extent those amounts are allocable to costs previously paid by the Government. This is another area in which we are awaiting additional guidance and will provide updates as they become available. If you have any further questions regarding either of these topics or need assistance on another topic, please feel free to contact KatzAbosch’s Government Contracting team, or contact us here. About KatzAbosch: Founded in 1969, KatzAbosch is one of the largest CPA and business consulting services in the Mid-Atlantic region. As an accounting firm, our mission is to provide the highest quality accounting, tax, financial and management consulting services to our regional clients. We understand the needs and challenges of our clients and we have made it our obligation to create, grow and protect asset value. KatzAbosch is consistently named a Best Accounting Firm to Work For in Accounting Today and has been named a Top 200 Accounting Firms in the Nation by Inside Public Accounting. Our firm is also ranked among the Top 15 Largest Accounting Firms in the Baltimore Area by the Baltimore Business Journal and a Top Workplace four times by The Baltimore Sun.