As construction projects around the country begin to reopen after COVID-19 shutdowns, contractors are returning to work. Whether because of reduced customer demand or government mandate, many have endured months of inactivity and the lack of revenue to go along with it.
A popular source of financial relief for the construction industry has been Paycheck Protection Program (PPP) loans, authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress to reduce the negative economic effects imposed by the novel coronavirus.
The loans are forgivable if spent on certain payroll and other costs; otherwise, they must be paid back in two years at 1% interest.
In fact, the construction industry had the greatest share of PPP loan recipients — 13.2% — for a total of almost $45 billion as of April 16, which is the latest data available. But the Small Business Administration and the Treasury Department constantly changed guidance about the program’s terms, including potential penalties, audits and eligibility, so some contractors decided to either not apply to the program or give the money back.
Congress earlier this month passed some changes to the program, though, that should clarify the rules and make the PPP more user friendly. But there are other options contractors should consider if they don’t want or cannot qualify for a PPP loan.
Other federal loans
The Main Street Lending Program was established by the Federal Reserve in response to the COVID-19 outbreak and makes loans to small- and medium-sized businesses — through authorized lenders — that were in “sound financial condition” before the pandemic.
There are three types of facilities available through the program:
- Main Street New Loan Facility (MSNLF) — these loans are available to companies with 15,000 or fewer employees and $5 billion or less in revenue. The company must pay the loan, generally capped at the lesser of $35 million or four times the borrower’s adjusted 2019 EBITDA (earnings before interest, taxes, depreciation and amortization) within five years. The minimum loan size is $250,000.
- Main Street Priority Loan Facility (MSPLF) — these loans have similar requirements as the MSNLF except the maximum loan is limited to the lesser of $50 million or six times the borrower’s EBITDA. The minimum loan size is $250,000.
- Main Street Expanded Loan Facility (MSELF) — these loans have many of the same requirements as the other two facilities, but the loan size is limited to the lesser of $300 million or six times the borrower’s EBITDA. The minimum loan size is $10 million.
Even though the names of these loans include the phrase “Main Street,” indicating they are for the average company, underwriting is onerous, and they are clearly intended for large companies, said Michael Ceschini, managing member at Ceschini CPAs Tax and Advisory PLLC in New York. For the smaller companies that need some financial relief, he said, the program has not been well received.
In an effort to make them more accessible, the terms reflect changes that the Fed made in the last week. The agency also changed the repayment terms from four years to five and allows recipients to defer principal payments for two years and interest payments for one.
Borrowers are not eligible to participate if they borrowed money through the PPP.
Debt relief
For those construction firms that already have certain loans backed by the SBA — 7(a) general lending program, 504 loans for major fixed assets and microloans — the administration has decided to pay six months of all borrowers’ payments. This includes principal, interest and other loan-related fees.
The SBA has directed all of its lenders to stop collection attempts on these loans for that time period.
Tax relief
The CARES Act also provides construction firms and other employers with extra relief through tax credit and deferrals.
The Employee Retention Credit entitles eligible employers to take a 50% credit against their employment taxes on up to $10,000 of wages per employee for a maximum credit of $5,000 per employee. Rules regarding the tax credit are:
- Wages must be paid after March 12, 2021 and before Jan. 1, 2021.
- Employers must have experienced either the full or partial suspension of business due to government-mandated COVID-19 limitations on business activity or a significant decrease in revenue.
- The employer must not have taken a PPP loan or received a credit for paid sick or family leave under section 45S of the Internal Revenue Code or Families First Coronavirus Response Act for the wages.
- Wages subject to a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code are not eligible for the ERC.
Employers are also able to of their share of social security payroll taxes for wages paid from March 27 until Dec. 31. Employers must pay 50% of total deferred taxes by Dec. 31, 2021 and the balance by Dec. 31, 2022.
“This,” Ceschini said, “could be pretty significant, especially for contractors that generally have a large payroll.”
But while the deferral program might look good now, said Matt Turkstra, the Associated General Contractors of America’s director of Congressional Relations for Tax, Fiscal Affairs and Accounting, it could cause contractors problems down the road.
“I would be a little concerned as a business owner in deferring federal taxes by so much that I would then struggle to pay all that additional tax liability back over the next two years,” he said. “I definitely think it’s helpful and something that folks would want to take advantage of if they can, but, at the same time, it’s a loan that does have to be paid back.”
Employers that receive loan forgiveness under the PPP cannot defer taxes due after the forgiveness date.
Turkstra said that one of the most helpful provisions intended to get businesses back on their feet in the wake of the COVID-19 pandemic is an extension of net operating loss carrybacks. This allows a business that is experiencing losses this year to carry back those losses against previous tax years’ liabilities. In essence, he said, it allows businesses to file for a tax refund for those years.
“It’s a very useful counter-cyclical tax policy that can provide struggling businesses with an immediate cash infusion based on their previous years’ tax returns,” Turkstra said.
Congress passed the CARES Act, he said, in the early days of the COVID-19 pandemic and under the assumption that the crisis would last about eight weeks, so there could be more changes coming, as well as more provisions that would be helpful to contractors.
“We just need to be aware of those,” Turkstra said, “and make sure that Congress is listening to the concerns of business owners as they are getting through this and making sure that [the provisions] are as useful as [lawmakers] intended them to be.”
https://www.constructiondive.com/news/non-ppp-financial-relief-options-for-contractors/579615/