IRS Ruling on 4/30/2020
In our efforts to keep you informed on what seems like a constantly evolving CARES Act small business aid package, we wanted to share with you some new information regarding the Paycheck Protection Program (PPP). When the program was first introduced, Congress stated that the funds that are forgiven will not be included in your tax return as taxable income. On April 30, 2020, the IRS released guidance stating that expenses related to forgivable loans through the Paycheck Protection Program (PPP) will not be tax-deductible. IRS Notice 2020-32 confirms you can’t claim tax deductions, even for the wages, rent, etc. that would normally be fully deductible if those expenses were paid with the PPP AND those amounts are forgiven.
Under the PPP, a small business loan program created as part of the third, $2.2 trillion coronavirus relief bill, small businesses wouldn’t have to repay the low-interest loan they received as long as the loan went to essential expenses such as maintaining payroll.
In normal tax circumstances, payroll expenses would be considered deductible and forgiven debt would be considered as taxable income. However, the PPP forgiven debt under the CARES Act is not counted as taxable income. Therefore, the IRS determined that expenses that result in the forgiveness of a PPP loan are not tax deductible in order to prevent a “double tax benefit”.
The AICPA is challenging this ruling as they think the IRS’ interpretations contradict Congress’ intent of the program.
So that begs the question, how much of my loan will be forgiven?
The stipulations around the forgiveness of the loan dictate that if you use the loan amount for payroll costs, mortgage interest, rent, and utilities payments within 8 weeks of receiving the loan, it will be forgiven. Forgiveness of the loan is not automatic and must be applied for through your lending bank. Accurate documentation and record keeping of the use of the PPP loan is critical to loan forgiveness.
It is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. You are also required to maintain your staff and payroll in order to qualify for loan forgiveness. Your loan forgiveness will be reduced if you decrease your full-time employee headcount. It will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. You do have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
We would love to help you navigate this loan, its forgiveness and how it will affect your taxes in 2020. Feel free to schedule a meeting with one of our experts if you have additional questions.