THE IRS WILL NOT ALLOW PAYROLL DEDUCTIONS...
Updated: May 9, 2020
RELATED TO THE PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS (PPP)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27th, 2020. The Paycheck Protection Program (PPP) established by the CARES Act is implemented by the Small Business Administration with support from the Department of the Treasury. This program provides small businesses that meet certain criteria with funds to pay up to 8 weeks of payroll costs including benefits, and the funds can also be used to pay interest on mortgages, rent, and utilities. The PPP is intended to support these businesses in the retention of their employees during the current COVID-19 pandemic. This is very important for troubled businesses that meet the eligibility requirements as, up 100% of the loan may be forgiven if the funds are used for payroll costs and other eligible expenses during the 8 week period.
Even though the CARES Act itself states that any forgiveness of a PPP loan is a nontaxable event to the borrower, The IRS has issued Notice 2020-32, basically stating that no deduction will be allowed by the IRS for an expense if the payment of such amount results in forgiveness of a covered loan under the CARES Act. The IRS Notice does provide a substantial analysis as to why the IRS has made this decision. A legislative fix to reverse the effect of the notice issued by the IRS may be part of broader negotiations on the next round of COVID-19 stimulus discussed in Congress.
IRS Notice 2020-32 states as follows:
This notice provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). 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.
For now, any taxable income projections for the current year should be updated to reflect the disallowance of payroll and other expenses funded by a PPP loan that is anticipated to be forgiven. Business owners may want to discuss the effect of this with their accountant or financial advisor.
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