Accounting and Reconciliation of COVID-19 Impact

COVID-19 has created numerous challenges for businesses around the world. While new laws aimed at reducing financial burden provide significant pandemic relief, they also required an unprecedented financial reporting interpretation of the aid.  Construction business is considered as a high-risk activity and its financial statements are closely scrutinized by lenders or sureties during the anticipated economic downturn. It is even more critical for construction company to ensure proper financial reporting.  Following areas may require additional attention:

PPP Loan Forgiveness & Financial Statement Reporting

Earlier this year, the U.S. Paycheck Protection Program (PPP) gave out $525 billion in loans to businesses impacted by COVID-19. More than $12 billion in PPP loans went to contractors throughout the United States. Business owners can have this loan forgiven if they use the money for approved expenses like rent, utilities, and paying employees. Unfortunately, this process was not clear and the guidelines were constantly changing. Many business owners were unsure how to apply for forgiveness.

Companies seeking loan forgiveness must fill out a loan forgiveness application (Form 3508). The SBA and the U.S. Treasury Department provide detailed instructions for filling out this form. Construction companies that received $50,000 or less can fill out Form 3508S, a simplified version of the SBA loan forgiveness application. Despite step-by-step instructions on completing the calculations required for loan forgiveness, business owners should consult with an experienced construction industry accountant for help completing this form.

The United States Small Business Association (SBA) opened its forgiveness portal for PPP loans in August. Borrowers have ten months from the end of their chosen covered period to apply. Once the application is received by the lender, the lender has sixty days to render a forgiveness decision and request payment from the SBA.

Most companies accounted the PPP loan as a financial liability as expected. Companies that plan to comply with the program’s terms for forgiveness can account for the PPP loan as a government grant.  Or companies will recognize income from the forgiveness when their legal obligation for the debt is extinguished.  Again, it’s recommended that business owners speak with an experienced financial consultant for advice.

EIDL Loan Advance

Many construction companies received an advance through the Economic Injury Disaster Loan (EIDL) program. This advance will be deducted from the total forgivable amount of the PPP loan. For example, if a company received a $10,000 advance and a $100,000 PPP loan, the maximum amount eligible for forgiveness is $90,000.   The remaining EIDL loan balance should be amortized over a 30-year period.  As companies are not required to make repayments immediately, accrued interest should be calculated and added to the loan balance. 

Payroll Tax Deferrals

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, U.S. businesses may defer paying Social Security payroll tax on wages paid between March 27, 2020 and December 31, 2020. The payroll deferral does not apply to the employee’s portion of the Social Security tax or the Medicare tax. Businesses must pay back the deferred amounts in two payments. One-half is due at the end of 2021, and the remainder at the end of 2022. If companies take advantage of payroll tax deferral aid program, they must keep clear and accurate records for weekly payroll.  Construction company’s payroll processing is frequent and complicated, and we recommend companies maintain a reconciliation for each pay period for the entire deferral period.

Variable Consideration for Construction Delays

The need for increased cleaning of job sites and offices, temperature checks, and other activities required to maintain a healthy environment increases costs and causes delays for many construction projects. Additionally, many contractors experience decreased productivity due to employee absenteeism, illness, quarantine, lack of childcare, reduced on-site staff, and additional workloads.

It’s likely that COVID-19 will not impact the ability of owners to enforce liquidated damages provisions on contracts entered into before the pandemic began. However, a force majeure provision in the contract may provide the contractor with additional time to perform. This clause allows for unexpected disruptions outside of the control of the contractor. Delays caused by COVID-19 would likely fall under this provision.  We encourage contractors consult with legal counsel for any jobs with a liquidated damage provision and you are unsure of the impact and interpretation in the contract.  

Conclusion

COVID-19 has created many unique challenges for businesses in the construction industry. Construction companies could benefit from speaking with an experienced construction industry accountant. Allen Construction Group has over eighteen years of construction finance experience. Please contact us to schedule a consultation.