Impact of Paycheck Protection Program Loans on the Construction Industry

Uncertainty certainly defined 2020. COVID-19 became real for many when the first pandemic-related cancellation occurred in March 2020. The events that followed, like school and restaurant closings and cancellations of major sporting events, sent an unprecedented shock throughout every aspect of life.

This article will explore how the Paycheck Protection Program (PPP) has impacted the construction industry and offer some best practices for moving forward with the forgiveness application.

As we approach the forgiveness application deadline, most loan recipients are somewhere between preparing the application for forgiveness, awaiting an answer from their bank or the U.S. Small Business Administration (SBA), or celebrating that they have received the coveted letter of forgiveness. Recipients will need to determine how best to report the loans for financial statement and income tax return purposes.


In March 2020, the federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)1 and later the Paycheck Protection Program Flexibility Act.2 One major provision of the CARES Act was the PPP, which offered immediate, low interest rate (1%) loans that were guaranteed by the SBA.3

The program was available primarily to small businesses with fewer than 500 employees4 and was designed to prevent layoffs and cover fixed costs (such as rent, utilities, and interest on loans) from potential defaults.5 Initial repayment terms were two years with payments6 deferred for six months,7 which was expanded in June 2020 to five years with payments deferred for 10 months.8 Most important, the loans could qualify for complete forgiveness if the recipient met certain compliance provisions.9

Not surprisingly, many elements of the program were not well defined. The U.S. Treasury Department responded by publishing a series of “Paycheck Protection Program Loans: Frequently Asked Questions (FAQs),”10 which provided a lot of clarification regarding the mechanics of the forgiveness application. However, some of the answers created further uncertainty and confusion and seemed to expand the requirements of the program beyond the original CARES Act.

Specifically, FAQ #31 brought into question the required certification that “[c]urrent economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.” It further stated that it was “unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” It gave borrowers an out by saying “any borrower that applied for a PPP loan prior to the issuance of this guidance and repaid the loan in full by May 18, 2020 will be deemed by SBA to have made the required certification in good faith.”

FAQ #37 expanded this response to privately owned companies. FAQ #39 stated that all loans in excess of $2 million would be reviewed by the SBA in consultation with the U.S. Treasury Department.

Some recipients immediately refunded the money, fearing prosecution because of undetermined rules. As a result of the public outcry, FAQ #46 was issued, which offered a safe harbor to any borrower of less than $2 million to be deemed to have met the required certification concerning the necessity of the loan request in good faith.

Borrowers with loans greater than $2 million would have the opportunity to repay the loan without further administrative enforcement or referrals to other agencies if the SBA determined that the borrower lacked an adequate basis for the required certification concerning the necessity for the loan request. 

IRS Weighs In

CARES Act §1106(i) stated that income resulting from forgiveness of the PPP loans would be free from federal income taxes. The IRS issued Notice 2020-32 declaring that no deduction is allowed for the payment of an expense that resulted in forgiveness of a PPP-covered loan.11 This not only appeared to conflict with the original intent of the CARES Act legislation, but was also issued with little implementation guidance.

On November 18, 2020, the IRS released Revenue Ruling 2020-27, which confirmed its position that “a taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act, may not deduct those expenses in the taxable year in which those expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”12

Consolidated Appropriations Act, 2021

On December 27, 2020, Congress enacted the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues13 within the Consolidated Appropriations Act, 2021,14 which among many things, expanded, extended, and clarified certain aspects of the CARES Act. PPP loans were specifically amended to include a Second Draw for qualified borrowers and the program was extended through March 31, 2021.15 And, perhaps more importantly, this allowed expenses paid for by loan funds and forgiven under the PPP to be deducted against taxable income, which overrides initial IRS guidance.16

Also, within the Consolidated Appropriations Act, 2021, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, and later the American Rescue Plan Act of 2021 that was enacted on March 11, 2021, expanded provisions for Employee Retention Credits (ERC) and other areas that will significantly benefit construction companies that have experienced declines in revenues.

Of note, this retroactively uncoupled the ERCs from the PPP loans, potentially providing additional benefits. Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.17 Businesses that expect a 20% or greater decline in gross receipts in any quarter of 2021 as compared to the same quarter of 2019 may qualify for credits of up to $7,000 per employee per quarter in 2021 and should consider exploring the ERC.18

Impact on the Construction Industry

Nationwide, the construction industry is predominantly comprised of privately held businesses that met the initial qualifications for a PPP loan. The construction industry accounted for the largest percentage (13%) of approved PPP funds.19

Lenders, sureties, and other financial advisors readily encouraged participation to protect their customers from failure, knowing that increased credit would likely be scarce and bonding curtailed. Sureties even issued letters warning customers that using their lines of credit and/or equity could jeopardize future bonding capacity.

For many construction companies, work continued and remained profitable even while incurring additional costs to protect employees and make jobsites safer. This made the uncertainty less imminent, but long-term concerns remained. The industry has historically been a lagging participant in downward economic cycles and indications of potential issues persist. This has created a unique challenge of prudent business management that requires a combination of longer-term thinking while matching the use of the PPP loan funds to the program’s short-term compliance structure.  

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