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.
Stephen Riley, CFA, CFP, CPWA, is a co-founder of Clearview Wealth Solutions, a firm designed to manage custom-tailored portfolios in a tax-aware manner.
Gene Marks, CPA, is a columnist, author, and small-business owner. A past columnist for both The New York Times and The Washington Post, he now writes regularly for The Hill, The Philadelphia Inquirer, Forbes Inc. Magazine, Entrepreneur Magazine and Fox Business.
He has written five books on business management, specifically geared towards small and midsized companies. His most recent is "The Manufacturer’s Book of Lists." Nationally, he appears regularly on MSNBC and Fox News as well as The John Batchelor Show and SiriusXM’s Wharton Business Channel, where he talks about the financial, economic and technology issues that affect business leaders today.
Through his keynotes and breakout sessions, Marks helps business owners, executives and managers understand the political, economic and technological trends that will affect their companies and — most importantly — the actions they can take to continue to grow and profit.
He owns and operates the Marks Group PC, a 10-person firm that provides technology and consulting services to small and midsized businesses. Prior to starting the Marks Group, he spent nine years in the entrepreneurial services arm of the international consulting firm KPMG in Philadelphia where he was a senior manager.
Paul S. Hugel, Esq, is an attorney who has been practicing in the federal and state courts of New York for over 20 years. He is a partner in the law firm of Clayman & Rosenberg, LLP and has represented numerous clients in civil and criminal matters arising under United States securities laws. He can be reached at hugel@clayro.com.
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.
