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.
Martin Lowy, a former banking attorney, is the author of the books “High Rollers: Inside the S&L Debacle” and “Debt Spiral: How Credit Failed Capitalism.”
The Honorable Eugene A. Ludwig, the 27th comptroller of the currency, is a business and civic leader and expert on banking, regulation, risk management and fiscal policy. Mr. Ludwig is managing partner of Canapi Ventures, a venture capital firm focused on investments in early to growth-stage fintech companies, and CEO of Ludwig Advisors, which counsels financial firms on critical matters. He is the founder and former CEO and chairman of Promontory Financial Group, where he was an IBM executive after the firm was acquired in 2016. He is also the founder and former CEO and chairman of Promontory Interfinancial Network (now IntraFi Network), an early fintech company with approximately 3,000 bank members. Under his leadership, the Promontory family of companies became synonymous with excellence in compliance, risk management and financial services innovation.
In 2019, Mr. Ludwig founded the Ludwig Institute for Shared Economic Prosperity, or LISEP, a nonprofit organization dedicated to improving the economic well-being of middle- and lower-income Americans. Its research includes new economic indicators for unemployment, earnings and cost of living. LISEP's statistics aim to provide policymakers and the public a more transparent view into the economic situation of all Americans as compared with traditional metrics. He co-founded the Carol and Gene Ludwig Family Foundation, which provides grants to organizations that accelerate medical and scientific discovery in neurodegenerative diseases and enable access to educational and economic opportunity for young people.
Mr. Ludwig was previously vice chairman and senior control officer of Bankers Trust New York Corp., then the fifth largest U.S. banking organization. He was instrumental in steering the firm through its landmark merger with Deutsche Bank.
As comptroller from 1993 to 1998, Mr. Ludwig served as the Clinton administration's chief banking regulator and point person on the policy response to the credit crunch of the early 1990s. He fashioned an 11-point plan that was instrumental in ending the crunch and helping banks begin to lend again and fulfill their role of supporting the economy. He modernized and revised the bank regulatory framework, leading a multi-agency effort to overhaul the Community Reinvestment Act. Under his purview, lending to low- and moderate-income Americans increased tenfold, as did national bank investments in community development corporations. He brought the first fair-lending case in the nation and over the course of his leadership, 27 cases in all, resulting in tens of millions of dollars in fines against violators.
While he was comptroller, Mr. Ludwig served as chairman of the Federal Financial Institutions Examination Council, a member of the Basel Committee on Banking Supervision, a director of the Federal Deposit Insurance Corporation and chairman of the Neighborhood Reinvestment Corporation.
Mr. Ludwig was previously a partner at Covington & Burling, specializing in banking law. He has been a guest lecturer at multiple colleges and universities, including Yale and Harvard's law and business schools and Georgetown's International Law Institute.
Given his unique perspective as a regulator, lawyer, banker, business leader and trusted advisor to leading financial institutions, he is a sought-after thought leader. His pieces have been published in The Financial Times, The New York Times, The Atlantic, The Wall Street Journal, The Washington Post, Politico, Democracy Journal, American Banker, Time, Newsweek, Bloomberg, and on CNBC.com. His book, "The Vanishing American Dream," was published in September 2020.
Gene was born in Brooklyn, New York, and raised in York, Pennsylvania. He graduated magna cum laude from Haverford College and received a scholarship to Oxford University, where he earned a Master of Arts degree as a Keasbey Fellow. He earned a J.D. from Yale University, where he was editor of the Yale Law Journal and chairman of Yale Legislative Services.
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.
