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.
Daniel Schmid is vice president of sales for the Western U.S. with Trustmark Voluntary Benefits. He has more than 35 years of sales experience in the insurance industry.
A national policy leader with over 20 years of experience, Dr. Keita M. Franklin is the Chief Clinical Officer at Loyal Source Government Services– the nation’s leading healthcare solutions provider – and has consulted with many entities on issues related to workplace wellness. Prior to joining the Loyal Source team, Dr. Franklin was a senior executive at both the Department of Veteran Affairs (VA) and the Department of Defense (DoD), frequently representing the DoD and the VA during testimony in front of both chambers of Congress and advising the Office of the President, the Domestic Policy Council, and the National Security Council. During her tenure, Dr. Franklin led enterprise-wide programming for Veterans, military service members and their families.
Serving Loyal Source since inception, Brian Moore is a recognized creative solutions and results-oriented leader. Overseeing operations, and all Loyal Source Government Services business development efforts, Moore is responsible for the company’s strategic marketing and outreach programs, expertly designed to infiltrate and develop new government service venture opportunities for the business worldwide. Managing the company’s largest national and international client agency accounts, Moore’s decade of commercial and government business acumen has been integral to the development of the Loyal Source name, today known worldwide for developing innovative and market-variable human capital solutions on a global scale.
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.
