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.
Jason Pett, PwC's US Internal Audit, Compliance & Risk Management Solutions Leader, Financial Services Risk Assurance leader and part of the Global Internal Audit leadership team, has over 20 years of experience delivering internal audit, external audit and risk management services. He has led full outsource, large co-source and strategic sourcing engagements for many prominent companies, including leading internal audit functions for globally diversified Fortune 500 companies. Jason's extensive experience also includes implementing enterprise wide risk and compliance programs for organizations in a variety of industries and building integrated and synergistic risk, compliance and internal audit programs to optimize alignment and efficiency of delivery. He has assisted organizations in the design of start-up internal audit, risk management and compliance functions as well as working with companies to transform existing internal audit, compliance and risk management functions into value added, risk based and strategically aligned functions.
Bryan Yurcan is a senior writer with American Banker, with a focus on financial technology. Prior to American Banker, Bryan served as an editor with Bank Systems & Technology for nearly four years, as well as holding various other editorial roles for B2B tech and business publications. Bryan has been a guest speaker at bank technology industry conferences and has been quoted on the subject in numerous publications, including the Providence Business Journal and Columbus Dispatch.
Nicole Gelinas, a Chartered Financial Analyst, is a senior fellow at the Manhattan Institute and a contributing editor to the City Journal. She is the author of the book After the Fall: Saving Capitalism from Wall Street-and Washington.
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.
