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.
Groppel, Ph.D., is the co-founder of the Johnson & Johnson Human Performance Institute. He is an internationally recognized authority and pioneer in the science of human performance and co-chair of the newly formed Global Alliance for Health & Performance. Dr. Groppel currently serves on an academic appointment as Professor of Kinesiology & Community Health at the University of Illinois @ Urbana-Champaign, and served as an Adjunct Professor of Management at the J.L. Kellogg School of Management at Northwestern University for several years. Dr. Groppel has addressed the issue of worksite wellness and performance at such policy events as the United Nations Side Event for Physical Activity and Non-Communicable Disease, a U.S. Congressional Briefing on Worksite Health Promotion, and represented the worksite wellness industry at the historic Surgeon General’s Call to Action on Walking and Walkable Communities.
Jon Baron is managing director of the professional segment of the tax and accounting business of Thomson Reuters, which he joined in 1992. Prior to his current position, he served as president of professional software and services, and vice president of development, where he was responsible for the design and development of all professional products and services. He holds a BBA in Accounting from Siena College and an MBA from Boston University.
Bill Gaynor is a U.S. Healthcare Market Executive at MarkLogic who has led and managed strategy and growth initiatives for industry leaders such as Oracle, First Data, JPMorgan Chase, McKesson and Cambia Health.
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.
