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.
Sophia Yen is a Senior Principal at EY and the Strategy & Innovation Leader in the Insurance Consulting practice, focused on working with clients to drive profitable growth through strategic ventures, market trends & insights, innovation, and digitization and emerging technologies. She also serves on the EY Americas Insurance Leadership team.
Sophia has over 20 years of experience in the insurance industry with deep experience in reinsurance, insurance, banking, disruptive technologies and digital transformation. She has led global initiatives focusing on growth, M&A integrations and separations, integrated business and financial strategy planning, and streamlining target operating models.
Sophia has a unique combination of industry and consulting experiences as she started in consulting and then spent half of her career in the insurance and banking industry before returning to consulting. Some of her notable accomplishments included driving the transformation at UBS Investment Bank where she achieved more than 30 million in cost savings. Prior to UBS, she was at Swiss Re and held several senior leadership roles, including running their Americas Client Solutions team, SVP of Financial Services Origination, Chief of Staff to the CEO and COO and Head of Operations and Reporting, where she was responsible for the strategic financial planning, reporting, and operations of a $2.5+ billion portfolio and was a member of the Americas Executive Committee.
She holds an MBA from Columbia Business School and a Bachelor of Science (dual major: Finance & Computer Science) from Boston College and graduated both with high honors. She is a sought-after speaker at industry conferences throughout the Americas, EMEIA, and Asia on such topics as strategic transformation, digital transformation, enabling innovation, culture change, and diversity & inclusion. Sophia lives in Chappaqua, NY with her husband and daughter.
With the filing season upon us, a raft of brand new challenges await ahead of the April 15 deadline.
President-elect Joe Biden will seek a deal with Republicans on another round of COVID-19 relief, rather than attempting to ram a package through without their support, according to two people familiar with the matter.
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.
