The Internal Revenue Service released guidance this month to clarify the accounting treatment of payments under the Paycheck Protection Program and caused some consternation among some small businesses and tax experts. Many business owners who applied for loans under the PPP had the expectation the loans would be forgiven as long as their employees were paid for eight weeks, and the businesses would be able to write off their expenses as they traditionally have been able to do. The guidance puts this in doubt.
Notice 2020-32 clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan under the CARES Act. The income associated with the forgiveness is excluded from gross income.
Rachel Allen is Group Product Manager of Shared Mobility for Arity, a technology company founded by the Allstate Corporation. In this role, Rachel has been responsible for defining and bringing to market a set of products that use predictive risk and driving analytics to help operators build the next generation of a connected transportation network.
Prior to Arity Rachel worked at Accenture integrating multiple complex systems before joining HERE Maps where she built multi-model navigation products and then Conversant Media where she created user profiles based on geo-spacial travel patterns for Ad targeting. Rachel has a Masters in Science from Northwestern University and a Bachelors in Science from DePaul.
Sawad Thotathil, MD, clinician and senior director, Persistent Systems, directs product strategy and management for the company’s Digital Healthcare group.
Mike Dwyer brings 20 years of technical, architectural, and managerial experience in the insurance and telecommunications industries to his roles at EIS. Mike manages an engineering organization of more than 200 people in the United States and abroad, and plays a key role in designing, implementing, and successfully deploying the company's insurance software solutions to customers around the globe. Prior to joining EIS, Mike held a variety of engineering architecture and management roles for established and startup companies, including Sprint Corp., Interwave Communications, and Motorola.
Under section 1106(b) of the CARES Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses — payroll costs, any payment of interest on any covered mortgage obligation, any payment on any covered rent obligation and any covered utility payment — during the eight-week “covered period” beginning on the covered loan’s origination date.
The Paycheck Protection Program was designed to provide economic relief for businesses in the wake of COVID-19. If the requirements of section 1106(b) are met, PPP proceeds are excluded from taxable income and the corresponding PPP expenses that are essentially being reimbursed are not tax deductible despite being classified as ordinary expenses under section 162 of the Tax Code. Thus, PPP funding is a tax-exempt “wash” — PPP expenses are not tax deductible to the extent of tax-exempt PPP income. Since “PPP wages” are not currently tax deductible under the program, it will be interesting to see how businesses will be directed to prepare W-2s for 2020.
The CARES Act provides for the payment of fees from PPP funds for the processing of applications on a sliding scale beginning at a rate of 5 percent for loans up to $350,000. These fees have generally become earmarked for banks and other financial institutions despite the hope that many accounting and legal professionals would be eligible for these fees for services rendered in assisting clients to generate the needed paperwork throughout the application process. Banks are receiving tens of millions of dollars in fees from PPP funds to process loans for which they are not at risk. Banks are also collecting transfer fees from PPP funds when these proceeds are wired into business accounts.
The CARES Act legislation stimulus checks were processed based upon Form 1040 filings — essentially bypassing an application process. Similarly, perhaps PPP funding would be more efficiently disbursed if allocations were based upon prior Form 941 filings instead of assessing the same payroll information through a costly application process. Another relief measure would be to allow businesses to take tax deductions for PPP expenses despite the tax-exempt nature of PPP proceeds.
