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.
Tom Wilde has 25 years of experience in solving the complex problems of digital content. He is currently CEO of Indico, a provider of enterprise AI solutions for intelligent process automation. Previously Tom has held senior management roles at Cxense, Fast Search, Miva Systems and Lycos. He is a frequent industry contributor and earned his MBA in entrepreneurial management from Wharton.
Gary Holland heads verticals marketing of IP optical networks for Nokia and is responsible for marketing Nokia's IP and Optical Networks (ION) portfolio to Enterprise, Industries, Government and Public Sector verticals.
Barry Zane is vice president of engineering at Cambridge Semantics. He brings substantial development experience and industry expertise in building large-scale products for data analysis.
Prior to Cambridge Semantics, Zane was co-founder and CEO of SPARQL City where he served as vice president of technology, whose high performance scalable graph database technology has been acquired by Cambridge Semantics and integrated within its Smart Data Lake and other offerings.
Previously, Zane was co-founder and CTO of Paraccel, a high performance scalable relational database system which provides the basis for Amazon Redshift. Paraccel was acquired by Actian Corporation as the Matrix product line. He was a co-founder and vice president of technology and architecture at Netezza, which after a successful IPO, was acquired by IBM. Before Netezza, Barry was CTO of Applix, Inc. Applix was also later acquired by IBM.
Barry began his career at Prime Computer, as a hardware engineer and ultimately various roles in software development and management. He holds a degree in Electrical Engineering from Carnegie Mellon University.
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.
