PPP Loans – the IRS Adds a New Twist
Much of the news recently around the Paycheck Protection Program (PPP) has focused on the second round of funding outlined in the Paycheck Protection Program and Health Care Enhancement Act. The additional $370B allocated to the PPP and other SBA programs were welcomed by those businesses continuing to struggle through the COVID-19 emergency. On April 27, 2020, the Small Business Administration (SBA) began accepting loan applications providing much-needed working capital to borrowers. Concurrently, borrowers who already received loan funds have been focused on implementing best practices to ensure they qualify for the maximum amount of loan forgiveness possible. It’s against this backdrop that the IRS issued Notice 2020-32, which impacts the tax position of borrowers that receive loan forgiveness. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.
PPP Loans & Federal Taxes
When the program was introduced as part of the CARES Act, it was stated the amount of loan forgiveness received would not be included in the borrower’s gross income for tax purposes. This created an additional dimension of relief because businesses would not have to worry about paying taxes on the amount of the loan forgiven. However, there was an assumption that eligible business expenses (employee wages, rent, utilities, etc.) would also be deductible. These expenses are routinely deducted, so there was little concern anything would change.
The IRS has taken a different view on the matter. According to the Notice, there will be no deduction permitted for an otherwise deductible expense if the payment results in PPP loan forgiveness, and the forgiveness amount is excluded from gross income. This means that borrowers who receive loan forgiveness will not be able to deduct the expenses paid with the forgiven loan amount. This can result in higher federal income taxes because the typical deduction otherwise available has been prohibited.
What’s Next?
There appears to be a conflict between the intentions behind the CARES Act and how the IRS is interpreting the application of the law. At this point, it is unclear whether Congress will intervene with additional legislation designed to reverse the decision. However, there are many organizations, including the American Institute of Certified Public Accountants (AICPA), which are encouraging Congressional involvement. At this time, it’s difficult to determine whether a change will be made. We will continue to monitor the issue and will post further updates as necessary.
Contact Us
The PPP loan program is being regularly updated by various government agencies, including Treasury, SBA, and the IRS. Often there are more questions than answers, but our tax team is sifting through the details to provide information on the most important updates. If you have questions about the information outlined above or need assistance with another COVID-19-related tax or business continuity issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.