If your business received a PPP loan you need to be careful budgeting
Part of the CARES Act designed to stimulate the economy and keep people employed called the Paycheck Protection Program (PPP) offered loans to small businesses that would be forgiven “tax free” if used for payroll and expenses related to keeping employees working. With a second round of PPP funding now underway, many small businesses have been able to shore up their budgets and continue business in these difficult times. If you are running a small business and have adjusted your budget for the damage done from COVID as well as the benefit derived from the PPP be careful because the IRS does not see the total tax impact the same as most expected.
On April 30, the Internal Revenue Service (“IRS”) released Notice 2020-32 clarifying the IRS’s position with respect to the deductibility of certain expenses paid using loan proceeds received under the CARES Act’s Paycheck Protection Program (“PPP”). The recent IRS Notice confirms that no deductions will be permitted for otherwise deductible expenses to the extent such expenses are paid utilizing PPP loan proceeds that are ultimately forgiven and excluded from gross income under Section 1106(i) of the CARES Act.
So, while they are honoring the letter of the law by not taxing the forgiveness as revenue, they are essentially making it a tax by removing the business expenses related to it. While some think their argument makes sense, many (including myself) see this as an overreach and contrary to the intent and policy of the PPP.
There is significant opposition to the IRS’s position so this is worth watching but if you budgeted a bottom-line impact to keeping your business afloat you should consider what to do if your tax bill just grew larger than expected.
The outcome at this point is unknown as the Senate Finance Committee Chairman and the House Ways and Means Committee Chairman have both voiced opposition while Treasury Secretary Steve Mnuchin has publicly supported the IRS’s position.