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.
Rashed Haq is the global head of AI, robotics and data and group vice president at Publicis.Sapient. Over the past 20 years, Rashed has helped companies transform and create sustained competitive advantage, through innovative applications of artificial intelligence, dynamic optimization, advanced analytics and data engineering. Prior to joining Sapient, Rashed worked in Silicon Valley startups and has done research in theoretical physics at the Los Alamos National Lab and the Institute for Theoretical Science. His research included gravitation and black holes, astrophysics, quantum computing and quantum cloaking.
Charles Kolstad is a partner in the Los Angeles office of the international law firm Withersworldwide. He assists clients in tax and corporate planning relating to the acquisition, disposition and restructuring of businesses, corporations and partnerships both domestically and internationally. He frequently advises foreign individuals moving to the U.S. on pre-immigration, income, gift and estate tax planning opportunities. He also focuses his practice on the cannabis industry/cannabusiness, crypto assets and block chain technology, and tax issues related to initial coin offerings.
Marissa Buckley oversaw marketing and communications at Security First Insurance and is responsible for the implementation of the company’s customer experience strategy. She has more than 20 years’ experience in marketing and 15 years’ experience in software development and database management. Prior positions range from digital marketing, computer programmer, and web developer. Her unique skillset and expertise across technology and marketing have allowed her to effectively collaborate throughout system development and identify opportunities to improve the user experience across applications, increase conversion, and integrate marketing analytics to drive iterative development.
Leading the company’s user experience design and development, Marissa has also been involved with the company’s development of mobile applications and the nation’s first social media disaster response communications system. Her effort in the creative development of personalized customer videos garnered recognition as Celent’s 2015 Model Insurer, winning in the digital and omni-channel category. She earned her bachelor of science degree in management information systems from University of Central Florida and a master’s degree in integrated marketing communication at West Virginia 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.
