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.
Jeff is a founding member of Informed Consulting. He has 25+ plus years of employee benefits experience working with enterprise employers, digital health companies, health plans, insurance carriers, InsureTech, HCM, and financial wellness companies.
Via Informed Consulting, Jeff served as the CRO (Seed Round, Series A, and Series B) at Nayya. He held various sales leadership positions in 12 years at Benefitfocus, a benefits administration company. At Benefitfocus, Jeff developed an ecosystem distribution market for early-stage digital health and financial wellness companies. Prior to Benefitfocus, Jeff worked for health plans and insurance carriers for 13 years.
Jeff was named by Employee Benefits Advisor as “30 Benefit Thought Leaders to Know” and “30 People to watch in Benefits 2017”. Jeff has been featured in CNBC, Inc Magazine, Forbes, Employee Benefits News, US News and World Report, SHRM Magazine, and numerous other publications.
Julia Hu is an American entrepreneur and the co-founder and CEO of Lark. Founded on the personal experience of having grown up with an undiagnosed chronic condition, Julia is passionate about bringing compassionate care to those preventing or managing chronic disease. Hu was named to Business Insider’s 30 Under 40 Changing Healthcare list and was awarded as a member of the UCSF Health Awards Hall of Fame in 2021, as well as the EY Entrepreneurial Winning Women™ North America Class of 2021. Prior to founding Lark in 2011, Julia ran global startup incubator, the Clean Tech Open, built a sustainable construction startup, and was an Entrepreneur-in-Residence at Stanford’s StartX incubator. She is on the board of the Council for Diabetes Prevention and a Singularity University faculty member. Hu received her Master’s and Bachelor’s degrees at Stanford University and half of an MBA from MIT Sloan before founding Lark.
Bernie Dyme is president and CEO of Perspectives LTD, a behavioral health firm committed to delivering high-quality employee assistance programs, behavioral health, and organizational consulting services.
He is passionate about ending the stigma attached to mental health ensuring that everyone in companies has full access to mental health services and also focuses on prevention and early intervention. He is an active member of more than a dozen professional and community organizations that work toward his passion of bringing resources to all employees and organizations to ensure full access to help. These include the Employee Assistance Professionals Association (EAPA), the Society of Human Resource Professionals (SHRM), and the Executives Club of Chicago. He is also the Chair of the Advisory Council of The Crown Family School of Social Work, Policy and Practice at the University of Chicago. He is the past president of the Board of Directors for the Chicago Coalition for the Homeless and is currently an active member of the Board.
Bernie is a licensed clinical social worker (LCSW). He has his master’s degree in social work from the University of Chicago.
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.
