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.
Berend de Jong is the Global Insurance and Finance Lead at Planet, a leading provider of global, daily satellite imagery and geospatial solutions. Planet is driven by a mission to image the world every day and make change visible, accessible and actionable. Founded in 2010 by three NASA scientists, Planet designs, builds and operates the largest Earth observation fleet of imaging satellites. The company provides mission-critical data, advanced insights and software solutions to customers across agriculture, forestry, intelligence, education and finance, as well as government agencies, enabling users to simply and effectively derive unique value from satellite imagery.
As director of account anagement, Jill Dobbe builds strong relationships with Orgvue clients, guiding them to enhance their organizational planning capabilities through technological solutions. With more than two decades of expertise in strategic planning, human resources, and organizational development—including extensive experience supporting Fortune 100-500 organizations and serving within John Deere and a non-profit healthcare system—Jill is dedicated to empowering organizations to define and achieve their future strategies. Her comprehensive background encompasses successful leadership of initiatives in strategic workforce planning, analytics, organizational design, transformation, and change management across diverse industries and global environments.
TuongVy "Vy" Le is general counsel of Veda Tech Labs, which builds institutional-grade, noncustodial vault infrastructure for digital asset markets. Previously, she served as the general counsel of a federally regulated crypto bank, head of regulatory and policy at a registered investment advisor, and chief counsel of the Office of Legislative and Intergovernmental Affairs and senior counsel in the Division of Enforcement at the SEC.
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.
