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.
George Avetisov is CEO of HYPR Corp. He has experience in developing cyber fraud and e-commerce, coupled with a strong drive to build a secure Internet ecosystem, and has worked on technology for connected devices.
Rob Blackwell is the chief content officer of IntraFi Network and the host of the Banking with Interest podcast. He is the former editor-in-chief of American Banker.
He covered the financial services arena for nearly two decades, working first as a reporter covering Fannie Mae and Freddie Mac, the banking regulators, and anti-money laundering rules, among other topics. In 2005, he was named Washington Bureau Chief and subsequently helped guide the paper through its coverage of the worst financial crisis since the Great Depression, including articles on “too big to fail” and the drafting and passage of the Dodd-Frank Act.
In 2014, he was promoted to Group Editorial Director for Regulatory Policy for SourceMedia, leading the coverage of financial policy issues for American Banker, National Mortgage News, Credit Union Journal and PaymentsSource. He was promoted to Editor-in-Chief of American Banker in September 2017.
In 2017, Rob was given the Neal Award's Tim White Award, which recognizes editors "whose work displays extraordinary courage, integrity, and passion." He has helped American Banker win several Neal and Azbee awards as a reporter and editor, covering topics such as deposit insurance reform, the Wells Fargo phony-accounts scandal, American Samoa's effort to charter its own public bank, and the leadership fight at the CFPB. He has appeared on NPR, BBC, CNBC, Fox Business and C-SPAN as an expert on financial regulatory policy. He is also the author of six novels.
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.
