New IRS Guidance: PPP Loan Expenses Not Tax Deductible
The Internal Revenue Service issued new guidance April 30 stating that expenses related to forgivable Paycheck Protection Program loans are not tax deductible.
IRS Notice 2020-32 declares that expenses resulting in forgiveness of a PPP loan are not tax deductible in order to prevent a “double tax benefit.”
The agency cited Section 256 of the federal tax code, which excludes deductions tied to a certain class of tax-exempt income:
Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.
The PPP program is the federal government’s main small business coronavirus relief program, offering forgivable loans up to $10 million to employers with 500 or fewer employees.
Created through the CARES Act and recapitalized last month by Congress, the program’s 1% interest loans are forgivable if used for payroll and certain other expenses such as mortgage, rent, and utility payments.
‘Contrary to Intent’
While wages are deductible expenses and forgiven debt counts as taxable income, the CARES Act intended that PPP loan forgiveness not count as taxable.
A number of members of Congress expressed disappointment with the IRS guidance, including Iowa Republican Chuck Grassley, chair of the Senate Finance Committee.
“The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees, and recover from this health crisis as quickly as possible,” he said in a statement.
“This notice is contrary to that intent.”
Loan forgiveness is not automatic. Loan recipients must request it through their lender and provide supporting documentation for the request.
Lenders must act on forgiveness requests within 60 days.
Congress could act to override the IRS ruling by passing a law explicitly allowing deductions.
The U.S. Small Business Administration, which is administering the program, missed an April 26 deadline for issuing guidance clarifying loan forgiveness requirements.
The SBA and the Treasury Department require that businesses spend at least 75% of a loan on payroll to qualify for forgiveness.
The implications for a business that does not spend all of the loan amount within eight weeks of receiving funds, as the act requires, are still unclear.
There also other questions that have not been resolved, including the issue of expenses incurred during the eight weeks but paid later.
As of May 1, the SBA reports that 2.2 million loans totaling $175.7 billion had been processed in the second round of lending which began April 27 after Congress approved an additional $320 billion in funding.
Second round loans averaged $79,000, compared with $209,000 in the first round.
Employee Retention Credit
The IRS also released new guidance April 29 addressing another CARES Act initiative, the Employee Retention Credit program.
The refundable credit represents 50% of up to $10,000 in wages paid by an eligible employer whose business is financially impacted by COVID-19.
The latest guidance was released through a set of frequently asked questions on the IRS website.
The credit is available to all employers regardless of size, including tax-exempt organizations, with two exceptions—state and local governments and employers that accept small business loans, including PPP loans.
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