EPISODE 56: Growthcast welcomes back DHG's Bill Walter, Managing Director of DHG's government contracting practice, to discuss how changes and updates to the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) can impact government contractors.
[00:00:08] JL: Welcome to today’s edition of DHG’s GrowthCast. I’m your host, John Locke. At DHG, our strength relies on our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG’s GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace.
Thanks for joining us as we discuss tomorrow's needs today.
[00:00:41] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.
[00:00:57] JL: Welcome back to GrowthCast, and we’ve previously spoken with DHG’s Denny Ard about the most recent changes to the Payroll Protection Program. Today, we will be speaking with Bill Walter, Managing Director of our government contracting advisory team and the PPP Task Force, about how these changes specifically impact government contractors. Bill, welcome to GrowthCast today.
[00:01:21] BW: Hey, glad to be here.
[00:01:23] JL: Bill, congress passed the CARES Act in March of 2020, which created the PPP to help businesses get through the economic disruptions created by the pandemic. The Consolidated Appropriations Act that was passed just recently amended some of the provisions established by the CARES Act. It's my understanding that this included allowing eligible businesses to make a second draw of PPP loans and different calculations for first and second-time borrowers. Bill, what other changes were due to the passage of the CAA?
[00:01:58] BW: Well, one of the things that we've seen as that there are now additional non-payroll type expenses that can be considered eligible for forgiveness, still subject to that 40% limitation of the payroll costs. What this includes is business operation software, whether it's cloud computed, or the facilities that support that. Things that help you with your delivery, processing, payment, tracking of payroll expenses, HR, etc.
This is a pretty large opportunity for companies that wasn't included in the initial listing of those types of expenses. Also, last year, there was a lot of public unrest and there were small businesses that were damaged. If that small business didn't have insurance, they would be allowed to use some of the PPP loan to make the repairs to that. They also added a section four supplier costs, so things that you need to actually do your business.
Then finally, they added those types of things that you needed to get to provide the safety of your employees based on state guidelines for personal protective gear. Nobody's gone into a grocery store, or any other store and hasn't seen the large plastic shields that they've put in. Those types of expenses can also be used with PPP funding subject to that 40% limitation.
In addition, at the end of the year, the previous PPP identified, if you had taken a PPP, you would not be eligible for the employee retention credit. The employee retention credit is an additional amount of money that's a tax credit. If you have a PPP, you can still receive an ERC. It's just that you can't use the same dollars for both. You can't get a dollar of your PPP forgiven using that labor. Then you can't go back and also use those exact same dollars for the employee retention credit.
One of the other items that changed that we're seeing impacting some of our smaller government contractors is there is a streamlined forgiveness process, where you actually have – if you have a loan of less than a $150,000, it's a much easier form and a much easier set of documents that you need to provide.
[00:04:25] JL: With a few of these new wrinkles, I would imagine that there could be some potential auditing issues, if a business applies for the employee retention credit and the PPP loan.
[00:04:37] BW: Oh, absolutely. You're using the dollars that you paid your employees. Those dollars are being considered now for two different benefits. One, for forgiveness of a PPP loan, and payroll dollars additionally, for that employee retention credit or ERC. The wages are out there and how the companies document and identify the distinction between which dollars are being used for which purpose, we've had lots of questions that come in on there. There's no perfect answer.
[00:05:12] JL: Let's talk about government contractors and how are they specifically impacted by all this?
[00:05:18] BW: Well, government contractors are in a pretty unique situation, compared to commercial companies. Because if there is a government contractor that was performing work on a base, or in a government facility, and because of a state mandate, or a government mandate, they couldn't send their people into that facility and they couldn't work from home. They couldn't use an alternate workplace location. They have an opportunity to be reimbursed for that standby time for those employees under what's called section 3610. Once again, we've got those labor dollars that have the potential of being reimbursed under Section 3610.
We have those labor dollars that could be considered paid through the PPP loan proceeds and forgiven. We also have those same labor dollars that could be eligible for the ERC. You've got these labor dollars, a person's paycheck that hit the expense. Now you've got to be able to clearly identify that you're not double dipping, and you're only using it for ERC, or for PPP, or for Section 36 temp. Contractors need to make sure that how they account for this within their accounting system is complete. It can be audited. It can be verified. Because these dollars and government contractors, many who have especially cost reimbursement contracts, they are used to this level of cost accounting.
They really have to make sure that they don't have any of this double-dipping between these various benefits that are available. If they do have cost reimbursement contracts, there's actually a fourth bucket, which is getting reimbursed for the dollars directly on their government contract. There's a great opportunity for confusion, where they have to make sure that they've got all their ducks in a row and very neatly accounted for, because there will be auditors.
[00:07:15] JL: Yeah, I’m sure. Well, talk to us a little bit about any specific guidance that's been issued to help government contractors navigate this somewhat complex process.
[00:07:28] BW: Well, it's been very interesting, because we haven't seen a great deal of guidance on this. What we do have is the defense contract audit agency, which is the auditors for the Department of Defense, that actually audit government contractors. They issued a little bit of guidance earlier this year, with regards to how the DCAA auditors were going to be looking at the annual reporting for contractors that have cost reimbursement contracts and what they call their incurred cost submission.
In the guidance, it says, make sure you can see how the PPP forgiveness is being considered and how is the government getting the credits back to those cost reimbursement type contracts for the forgiveness of funds. When DCAA wrote this, it was actually before the CAA was passed. There's a lot of information in DCAA’s guidance that is no longer current. It does need to be updated. That's the only piece of guidance that we really have, other than what's in the regulations regarding cost reimbursement contracts.
With that, I get lots of questions. Probably a day doesn't go by, where I don't have two or three different calls from clients and prospective clients, asking about PPP, credits and government contracting. We're trying to do our best to keep the apprised of the most current guidance as we see it. This is something as you mentioned earlier, the CARES Act was passed in March of 2020. The PPP rules have changed throughout this entire process and they continue to change with the CAA. As we're getting new guidance each day, focusing more and more on the CARES Act and PPP. As government contractors start to put their incurred cost submissions together for this year, I think we're going to be seeing a little bit more guidance, because they actually have six months after the end of their fiscal year to put these together. I think we're going to start seeing a lot more questions coming in and hopefully, we'll have a little bit more in the term form of answers coming up soon.
[00:09:36] JL: If I'm a government contractor, Bill, and I'm trying to triage all of this information is flowing at me right now, what advice would you have for me? What might be the one or two things that I should do immediately to start dialing in this and taking advantage of the opportunities and also, being sure that I'm careful about my next steps?
[00:09:58] BW: I think documentation is the key. Documentation as to how you chose which of these various options to get reimbursed for your cost. If your PPP loan is over 2 million dollars and I know that the SBA inspector general is going to be looking a little bit closer at the economic necessity. We spoke about that in our last GrowthCast.
To me, clearly, documenting the decisions you're making, documenting how you use the PPP funding, being very clear and making sure that whenever you're talking about that with auditors, that you're very clear on how the funds were used and how your documentation supports that. Because to me, at the end of the day, that's the key to any audit is having that good documentation to support it. These audits can be a year or two, or three or four later. As you're busy trying to succeed and emerge strong from this pandemic situation, as soon as you get your wheels on the ground and you found the firm road, you want to be able to handle an audit when it comes through. Making sure that documentation is in place today, while it's fresh in your mind will certainly help you two, three years from now when the Inspector General comes in, if they want to look at it.
[00:11:20] JL: Yeah. Document, document, document, right? You can never document too much.
[00:11:27] BW: I guess, there are opportunities where you can document too much. You do have to make sure that whatever you documentation you have, it's clear.
[00:11:36] JL: Yeah. Exactly.
[00:11:37] BW: You want to make sure that if you have, you're considering both ERC and PPP forgiveness and cost reimbursement contracts and section 3610 and reimbursements. All of those things tie together. Your arguments, your documentation supports the decisions that are reflected in the numbers.
[00:11:58] JL: Right. If you don't understand, ask a good question, right? Never be afraid to ask questions.
[00:12:06] BW: That's the best advice you can give anybody. I've got seven kids, seven grandkids. I've been around for a long time. I'm not afraid to raise my hand and ask a question. Some people think, “Oh, it's going to make you look foolish.” I've learned, you look a lot more foolish if you don't ask the question. As you don't get that simple guidance today, it leads to a lot more need for assistance in the future.
[00:12:29] JL: Yeah. Great advice, Bill. I can't tell you how much I appreciate your time today. Thank you for all the hard work that you and your team are doing day in and day out to stay on top of this, and especially sharing some of these recent changes we've seen to the PPP through these various updates. Thanks for being with us today.
[00:12:46] BW: It was my pleasure. Thanks, John.
End of Interview
[00:12:49] JL: Thank you for joining us on GrowthCast with today's guest, Bill Walter, Managing Director of DHG’s Government Contracting Advisory Team. If you're involved in government contracting, we hope that you now have better clarity around the updates to the CARES Act, and the recent opportunities made available as a result of the Consolidated Appropriations Act.
I'm your host, John Locke, and I look forward to reconnecting with you soon on another episode of DHG GrowthCast.