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.
Fouad Khalil is head of compliance at SecurityScorecard, Inc.
As Strategic Research Actuary for RGA’s Global Research and Data Analytics (GRDA) team, Julianne Callaway researches emerging areas of interest to the insurance industry. Her insights on wellness, wearable technology, genetics, and other strategic research initiatives are shared with clients in presentations, white papers and articles.
Julianne joined RGA in 2013 as an Assistant Actuary in GRDA, where she oversaw research development for the department. Later Julianne was part of RGAx, the wholly-owned innovation incubator subsidiary of Reinsurance Group of America, Incorporated, for two years where she developed economic models for business concepts and market intelligence in support of innovative business initiatives.
Prior to joining RGA, Julianne spent nine years with Towers Watson, where she was a Senior Actuarial Analyst, responsible for loss reserving for several lines of business, establishing funding amounts for self-insurance funds, developing predictive models, and developing methods to estimate asbestos liabilities for corporations and insurers. She began her actuarial career at American Family Insurance, where she priced business lines insurance and was responsible for rate adequacy in several states.
Julianne has Bachelor of Science (B.S.) and Master of Arts (M.A.) degrees, both in economics, from the University of Missouri – Columbia. She is a Fellow in the Society of Actuaries (FSA), an Associate in the Casualty Actuarial Society (ACAS), and Member of the American Academy of Actuaries (MAAA). A prolific author, she has written and published several articles and white papers on a broad range of insurance topics. She is also a frequent speaker at industry conferences, and is currently a member of the Society of Actuaries’ General Insurance Research
Ted Tozer is a senior fellow in the housing finance program at the Milken Institute Center for Financial Markets. He was president of Ginnie Mae from 2010-2017.
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.
