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.
Professor Judge Mervyn King is a Senior Counsel and former Judge of the Supreme Court of South Africa. He is Professor Extraordinaire at the University of South Africa on Corporate Citizenship, Honorary Professor at the University of Pretoria and Visiting Professor at Rhodes UniversityHe has an honorary Doctor of Laws from the University of the Witwatersrand, is Chairman of the King Committee on Corporate Governance in South Africa, which produced King I, II and III, and is First Vice President of the Institute of Directors Southern Africa. He is Chairman of the International Integrated Reporting Council (IIRC), Chairman Emeritus of the Global Reporting Initiative (GRI) and a member of the Private Sector Advisory Group to the World Bank on Corporate Governance. He chaired the United Nations Committee on Governance and Oversight and was President of the Advertising Standards Authority for 15 years. He has been a chairman, director and chief executive of several companies listed on the London, Luxembourg and Johannesburg Stock Exchanges. He has consulted, advised and spoken on legal, business, advertising, sustainability and corporate governance issues in 53 countries and has received many awards. He is the author of two books on governance and sustainability and sits as an arbitrator and mediator internationally. His new book, co-authored with Linda de Beer, is The Auditor: Quo Vadis?
Chris Collins is a serial entrepreneur who has founded several technology start-ups in the HR tech and gaming spaces. Currently, he’s CEO of RoboRecruiter, one of the largest chatbot platforms with proven conversational technologies across hundreds built for people who hire professionally, by a team of staffing professionals who have achieved recruitment success. For more information about Chris Collins, follow him on Linkedin at https://www.linkedin.com/in/collinschris.
Pam White currently works for Cherry Bekaert LLP at its headquarters in Richmond, Virginia. Joining Cherry Bekaert in 2000, Pam started as an internal staff accountant. A controller since 2016, she is part of the finance & accounting department and oversees the accounts payable, payroll, and internal and subsidiary accounting for the firm. White graduated from Longwood College (now named Longwood University) in 1993 with a bachelor of science degree in business administration, with a concentration in accounting
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.
