Apportioning the Costs of Buildings
The SBA and Treasury have made it clear that if you own or lease a building that you sublet to another company, the portion of the lease or mortgage expense that can be used as nonpayroll costs for PPP loan forgiveness is limited to the share of the expense applied to the business who’s PPP loan is being forgiven. The simple example is, you lease an office building for $10,000 per month and sublease part of the space to another company for $2,500 per month. Only $7,500 would be used toward your nonpayroll cost for loan forgiveness. This proration applies to utility and other shared costs of the tenants.
Related Party Impacts
The SBA and Treasury put out another decision that impacts nonpayroll costs. Rent and lease expenses paid to a related party (e.g., owner of the business with the PPP loan owns the building rented by the business) are limited as follows:
- No more than the interest incurred by the owner of the building during the period;
- Prorated for only the space used by the business with the PPP loan; and
- Lease and mortgage were in place prior to February 15, 2020.
This could have a significant impact on potentially forgivable nonpayroll costs as the expense on the accounting records for the business with a PPP loan is likely to be at the stated lease amount.
Additionally, mortgage interest paid to a related party is not eligible for forgiveness. So, if the business owner holds the mortgage of the building now owned by the business, no interest expense can be used for PPP Loan forgiveness.
Complications for Government Contracts
FAR 31.205-11, 31.205-36, and 31.205-52 place limits on the cost charged to Government contracts for related party lease and rental costs. These limitations are likely to result in the amounts used to claim PPP Loan forgiveness being different than what is claimed for Government contract cost accounting purposes.
It is going to be very important to document the differences and the impact they have on cost claimed under Government contracts. DCAA auditors (in their “I am here to protect the taxpayer role”) are very likely to expect the entire amount of nonpayroll forgiven expenses be removed from contract costs. This may not be the case due to the FAR limitations and the forgiveness decisions above.
One Big Example
FAR 31.205-20 makes interest unallowable and therefore it is not claimed on Government contracts. Therefore, any amount of interest expense used to calculate PPP loan forgiveness should not be credited to contracts.
What You Need to Do
Document the PPP loan forgiveness amount and any amounts driving that forgiveness that were or were not credited to Government contract costs and why.
Redstone GCI is available to assist contractor’s in assessing their PPP Loan forgiveness impact on Government contract costs. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying applying FAR and other contract costing events.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant