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.
Deb is highly respected throughout the insurance industry for strategic thinking, thought provoking research, and advisory skills. Insurers and solution providers turn to Deb for insight and guidance on business and IT linkage, IT strategy, architecture, and eBusiness. Those seeking an edge in today's highly competitive world turn to Deb to capitalize on her deep industry knowledge and experience and her specialized understanding of distribution and underwriting automation.Deb has held leadership roles in premier insurance companies, professional services firms, and research advisory organizations, where she consistently demonstrated the ability to find new ways to leverage technology to achieve optimal business outcomes. Her skill set includes linking business strategy to IT strategy; development of business and IT road maps; selection, shaping, and delivery of enterprise/core solutions; and implementation of right-sized governance models.Prior to founding SMA, Deb served as Chief Transformation Officer for Insurance Company of the West (CIO) where she was recruited to deliver as much IT functionality to the business operations as possible in the least amount of time. Deb led company-wide change that included developing and integrating the corporate business strategies into 5 Strategic Initiatives. Before joining ICW, Deb launched and served as Managing Director of TowerGroup's Insurance Research & Consulting Practice. As a Partner at KPMG LLP, she launched an IT consulting practice specializing in the assessment and management of IT risks. She began her career at Liberty Mutual, where she directed a variety of large-scale system development projects and rose to leadership of the commercial lines application development group.Deb's expert opinion and counsel is in demand by press, clients, and major industry events. She is a frequent contributor to leading insurance trade journals and has been a keynote speaker at major conferences such as ACORD/LOMA Forum, NAMIC, ISOTECH, and IASA. Deb is a graduate of the University of New Hampshire with a B.S. in Business Administration.
Derek Rine is the benefits practice leader at David Rine Insurance.
Chris Howard is SVP of Callahan & Associates
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.
