As PPP loan forgiveness applications are being prepared by companies across the country, Congress is working on a stimulus package rumored to include provisions that reverse the IRS ruling that expenses paid with forgiven PPP funds will not be eligible for a 2020 tax year deduction. While we’re hopeful that comes to pass, we should be prepared if in fact, these amounts remain non-deductible. To that end, contractors should be aware of accounting issues unique to their industry relating to non-deductible PPP loan forgiveness.
Under IRC Section 460, “small” contractors (under $26 million) have a few options on the accounting method they can use for long-term contracts. One such popular method is the completed contract method, which allows contractors to defer reporting profit—revenue and expenses—until the year in which the job is completed. While this method can produce an attractive income deferral, in 2020 it comes with a caveat. If PPP funded compensation and other expenses remain non-deductible, contractors don’t have to concern themselves with that portion of the costs for jobs completed in 2021 until 2021.
Contractors can also choose to employ the percentage-of-completion accounting method. This method recognizes job profit based on how far a job has progressed at the end of a tax year. All “large” contractors are required to use this method. The percentage of the job costs that have been incurred to date is applied to the total contract price to determine how much revenue must be recognized on that job. However, if these jobs have PPP funded costs that are non-deductible, they should be excluded from the computation, thereby reducing the percentage-of-completion of the job and the amount of revenue to be recognized in the tax year.
Both methods could result in tax deferrals unique to contractors. Understanding how these costs interact with your method of accounting is paramount to ensuring your company is paying the least amount of tax in the event Congress does not overturn the IRS ruling. It will be imperative for contractors not only to document that their PPP expenses were used on allowable costs but also to track them back to the jobs on which they were incurred. HBK Construction Solutions can help you ensure you are documenting and job-costing your costs correctly to be certain you can take advantage of these deferrals and evaluate the various available accounting methods to ensure you maximize the cash retained by your business.