Last week, the Internal Revenue Service (IRS) issued Notice 2020-32, providing the first explicit guidance on the tax treatment of funds spent from the Paycheck Protection Program (PPP) loans.
PPP loans, as the name suggests, are to be used to cover expenses which include payroll-related expenses, such as salaries and wages, paid time off, and employer-paid healthcare expenses. Loan recipients hoping for forgiveness of these loans must not reduce the number of their employees below the number of employees calculated for the ‘base periods’ (of which there are two), nor may they reduce employees’ wages by more than 25% as compared with the last full quarter before the covered period, which is the 8 weeks following the loan’s origination date.
The CARES Act specifies that PPP loan recipients can receive forgiveness of loan amounts (subject to certain conditions) used to pay covered expenses, and that the forgiven portion of the loan is to be excluded from gross income for tax purposes. Note that no more than 25% of the loan proceeds can be used for non-payroll-related costs.
However, the CARES Act as written is silent on the tax treatment of expenses paid from the PPP Loan proceeds.
IRS Notice 2020-32 addresses the issue of the deductibility of expenses paid for with PPP proceeds. It clearly states that those costs which are paid for by PPP proceeds are not tax deductible. The IRS cites Code Section 265(a)(1), as well as several court cases on point, which support its position that deducting from taxable income any expenses which have been paid from tax-excludable income represents an impermissible double tax benefit. We recommend that, when expenses are paid out of PPP loan proceeds, you create several General Ledgers accounts to record these expenses, designating these expenses as non-deductible.
If you would like to read IRS Notice 2020-32, please click here.
According to a recent Forbes article, some members of Congress are unhappy with the IRS’ determination on this issue. The IRS acknowledges the lack of textual support in the CARES Act for its position. If you would like to read this article, please click here.
In addition, the American Institute of Certified Public Accountants (AICPA) takes the position that the IRS is acting contrary to Congress’ intent when they wrote the CARES Act in disallowing these deductions, and they are seeking legislative clarification. If you would like to read more on their position, please click here.
Stay tuned for further updates, as we know they will arise.
If you have questions on the PPP, or the CARES Act, please click here to email us directly – we are here to help.
Until next Wednesday –