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.
Johannes-Tobias Lorenz leads McKinsey’s work in digital insurance in Europe, helping insurers build their digital strategies, expand and serve direct markets, and strengthen their customer-service experience.
He also oversees the firm’s global customer experience for financial-services activities, helping financial institutions around the world transform the ways they meet the needs of increasingly demanding customers.
Some of his recent client work includes building a digital strategy for a leading global insurer and helping launch direct insurance players in Germany and other European markets. He also assists clients across Europe in areas such as social-media strategy and digital enablement of the tied-agents channel. Other projects include working with a number of insurers to digitize their customer journey for processes such as claims, life-insurance onboarding, and auto-insurance sales.
Furthermore, Lorenz helps private-equity firms on due diligences and portfolio work.
Lorenz has coauthored several McKinsey articles about issues confronting the insurance industry, such as insurance fraud and digital transformation.
Tanguy Catlin leads McKinsey's North American P&C Insurance Practice.
In addition, he is a leader of McKinsey’s Digital Strategy Practice and Digital Quotient™ (DQ) initiative, and helps companies build out their digital capabilities to deliver rapid results and sustained growth. DQ is an assessment that allows organizations to clearly identify their digital strengths and weaknesses across different parts of the organization, and compare them against hundreds of organizations around the world.
Catlin works with leading global financial service firms on multichannel distribution strategies, digitally enabled business model transformations, large scale marketing and sales programs. He also serves insurance clients more broadly on topics ranging from strategy and organization to operations, technology, claims, and underwriting.
His recent client engagements include assisting a top-ten property-and-casualty and life insurer in building an internal digital agency, helping a US multiline carrier accelerate test-and-learn capabilities and a personalization engine for its online channel, and working with a number of major multiline players to optimize their marketing spending across media, channels, and products.
Catlin frequently contributes to industry publications and has authored several McKinsey white papers on issues confronting the insurance industry.
Catlin is member of the Alumni Board of the MIT Sloan School of Management and a former board member of the Massachusetts chapter of March of Dimes, a nonprofit organization that works to improve the health of mothers and babies.
David McKeegan, MBA, EA is co-founder of Greenback Expat Tax Services, which specializes in preparing U.S. tax returns for American expats living all over the world. Greenback can be reached at info@GreenbackTaxServices.com and Twitter @GreenbackTax.
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.
