IRS Tax Guidance for the Paycheck Protection Program
Written by Brandon Allfrey, Tax Partner
The continually unfolding guidance regarding the economic stimulus packages for COVID-19 under the CARES Act is comparable to the twists and turns of the greatest of soap operas. Just when you think you know whats going on, something inevitably pops up to throw you off the storyline. On April 30th, the IRS issued guidance for tax purposes with regards to money received under the Paycheck Protection Program (PPP) and the expenses incurred with the money received.
The CARES Act was specifically crafted to ensure that the money received through the PPP program, and any forgiveness of the loan proceeds for using it for approved expenses specifically outlined, would not be considered taxable income for the companies receiving these funds. The key ingredient of these loans is for employers to use the money to keep their employees employed and pay them for an 8-week period, and to help pay for the expenses to keep businesses open. Meeting these requirements would allow for at least partial forgiveness of the loan proceeds received. Under normal circumstances, any loan forgiveness or debt cancellation would result in taxable income to the debtholder. The CARES Act specifically excluded this result for businesses so that they wouldn’t be penalized for keeping people employed as intended by Congress.
The IRS stated in IRS Notice 2020-32 that the exclusion of PPP loan forgiveness from taxable income triggers a clause already in the tax law regarding the use of the funds that are excluded from taxable income. The expenses incurred with the PPP funds for which the loan is forgiven are not deductible. The results are not as favorable as what people expected when the CARES Act was passed. Companies using the PPP funds to pay for payroll costs and rent, utilities, etc. as described in the CARES Act will not get to deduct those costs on their tax returns under the current tax rules.
It’s important to note that the IRS has not fabricated an interpretation of the CARES Act. The tax law already had this rule in effect. The Notice issued is a reminder that these are the current rules and they are enforcing the law as it exists. Specifically, the IRS pointed out that the CARES Act was written to exclude the forgiveness of the PPP Loans from taxable income but was silent on the deductibility of the expenses incurred with the tax-free money. They cannot make a judgment call on the intent of Congress regarding this. They are effectively telling Congress that if their intent was to have these expenses be deductible, they need to make it part of the law that they can then enforce.
As it stands right now, the expenses incurred with PPP funds for which businesses obtain forgiveness for are not considered to be deductible for tax purposes. This may require some advance planning and discussion for the bottom-line effects for each business. However, as the world turns with COIVD-19 and the CARES Act developments, the rules may be changed, altered, or clarified – “these are the days of our lives.” Stay tuned for the next episode.