How PPP Loan Forgiveness Will Impact Overhead Rates

Companies that are working on federal or state contracts should be aware that any loan forgiveness could have an impact on their overhead rates.  If you have state or federal contracts and are required to provide a price analysis in accordance with the Federal Acquisition Regulation (FAR), your overhead rates will be impacted by the amount of loan forgiven. This could result in a significant impact on the bottom line.

The guidelines for PPP recipients whose loans are forgiven, are to reduce the indirect cost pool used to calculate the overhead rate by the amount of the loan that is forgiven as a credit to the indirect expense.  This position is stated in FAR 31.201-5, which states:

“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. See 31.205-6(j)(3) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions.”

This reduction in overhead rates will be felt when you begin invoicing in 2021 under these rates that have been reduced by the credits.  The magnitude of impact will depend on the balance of a firm’s government versus private work.

These guidelines continue to evolve and there is some industry support for legislative relief but for now companies should assume that they will have to credit the overhead in the period the loan is forgiven.

Also, be aware, additional rules can apply to your overhead rates and how PPP funds are used or applied if you have state contracts or state contracts with federal funding.

How KatzAbosch Can Help

Each borrower has their own individual set of circumstances, and the answers are not always clear. If you have questions about your situation, please reach out to your KatzAbosch representative or contact us by clicking here.

To learn more about our Paycheck Protection Program services, click here.

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