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.
William Glasgall is Director of Public Finance at The Volcker Alliance in New York. A four-decade veteran financial journalist, Bill brings to the nonpartisan, nonprofit organization a deep knowledge of state and local government finances and fiscal policies and leads the Truth in State Budgeting and Financial Reporting project that is building on recommendations made in 2013 by the State Budget Crisis Task Force headed by Volcker Alliance Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch. Bill is also senior adviser to the Ravitch Fiscal Reporting Program at the CUNY Graduate School of Journalism in New York.Bill came to the Alliance from Bloomberg News, where he directed U.S. local-government coverage as Managing Editor for States and Municipalities that received awards from the National Press Club Foundation and other organizations. He also served as co-host of Bloomberg’s Global Week Ahead Podcast, as well as Editor-at-Large and Enterprise Editor, and has been a featured speaker at conferences held by Bloomberg, the Bond Buyer, Governing Magazine, Investment Advisor, and TD Ameritrade. Before joining Bloomberg, Bill spent almost 20 years at BusinessWeek Magazine as Senior Writer and Senior Editor, winning two Overseas Press Club prizes for international reporting and heading the magazine’s personal finance and lifestyle sections. He was also a regular commentator and host on the PBS-TV show “This Week in Business,” Editorial Director of the Investment Advisor Group, vice-president at Standard & Poor’s Corp., and a reporter and editor at the Associated Press and the Star-Ledger in Newark, New Jersey.Bill is a Trustee of the Overseas Press Club Foundation and former member of the Board of Overseers of the Knight-Bagehot Fellowship Program in Economics and Business Journalism at Columbia University, where he was a Fellow. He is a graduate of Boston University and lives in New Jersey.
Ajay Vij is senior vice president and industry head of financial services for Infosys.
Paul Atkins is the founder and chief executive of Patomak Global Partners. He served as commissioner on the Securities and Exchange Commission from 2002 to 2008 and was a member of the Congressional Oversight Panel for the Troubled Asset Relief Program from 2009 to 2010. He was a partner of PricewaterhouseCoopers and its predecessor firm, Coopers & Lybrand, and began his career as a lawyer with Davis Polk & Wardwell.
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.
