By now, we are sure you are aware of the Payroll Protection Program (PPP) under the CARES Act. This program was highly publicized for its support of small businesses through fully guaranteed, low interest loans to keep workers employed during the COVID-19 crisis. These loans are eligible for forgiveness if certain criteria are met regarding the use of funds and the maintenance of employee and compensation levels.
On April 30th, the IRS released guidance that could potentially eliminate much of the benefit to small businesses unless Congress intervenes.
The IRS stated that PPP funds are not eligible for tax deductions when used for expenses such as payroll and rent, which are typically deductible. While forgiven debt is normally taxable income, under the CARES Act, PPP loan forgiveness is not taxable. The agency’s reasoning with this guidance is to prevent a “double tax benefit.”
Generally, tax law does not allow expense deductions from income that would otherwise be tax-exempt. When enacted, the CARES Act did not create an exception to this current rule; however, the IRS interpretation does not appear to align with the intent of Congress when the program was designed. There is growing legislative support to address this misalignment.
If not rectified, this could result in higher taxable income and offset at least a portion of the planned benefit of the fully forgivable loan. The overall impact will vary based upon your business’s overall financial results but could potentially result in an unforeseen tax burden. While there is still time for Congress to intervene, you may want to reach out to your tax advisor to understand the potential impact to your business.
You can read the IRS guidance (Notice 2020-32) here
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