Congress passed the CARES Act and a big part of it was the Paycheck Protection Program (PPP) loans. If you spent the PPP money on payroll costs plus rent and utilities or mortgage interest, you could have the money spent from the PPP loan on these costs forgiven. We’ve spent a lot of time figuring out which expenses go towards the forgiveness and how those calculations would work, including a lot of time on strategies for spending the money on those correct expenses. Now we have a huge new wrinkle to add to the mix. PPP loan forgiveness and deductibility details are changing.
Normally when you have debt forgiven, the result is taxable income. In this situation, Congress put into the CARES Act the debt forgiven on PPP loans would not be taxable income. It seems clear from the text of the bill and the comments made by some Congress members who helped draft the bill, they intended for the debt forgiveness to not be taxable income, but the business owner could still deduct the payroll and other costs that were incurred. Unfortunately, the deductions side was not spelled out in the CARES Act, and it appears that omitting a discussion of the expenses is going to be detrimental for everyone with a PPP loan right now as it relates to tax deductions not being able to be taken.
More than a month after the CARES Act was passed, we are still awaiting much guidance from the SBA on details and nuances of the debt forgiveness. Now the IRS has weighed in on the deductibility of deductions where PPP loan forgiveness is achieved.
The IRS put out Notice 2020-32 on April 30th in the evening which says that any expenses used to obtain the PPP loan forgiveness will not be deductible. The precedents cited by the IRS are incredibly old tax court cases that obviously are not a perfect match for pandemic debt forgiveness.
The CARES Act doesn’t really say anything about the deductibility of the expenses, and now the IRS says you cannot deduct the expenses if you achieve the loan forgiveness. That’s not good for taxpayers. So, what now?
Well, my advice now is that you will not be able to deduct your expenses, but as I’ve said from the beginning, you need to stay tuned. I think Congress could easily fix this with another bill they pass so that business owners can deduct the PPP loan forgiveness expenses.
It’s impossible to make predictions with tax law, but the one thing I am sure of and I am willing to predict is that if you stay up-to-date with the latest developments, you’ll be able to make more informed decisions. Every plan for PPP funds needs to be revised immediately based on this guidance, but we could easily have it go back the other way in another 2 weeks. My guidance is that vigilance and using the most up-to-date information for your planning and strategy is paramount to having success in navigating these unusual economic times.
For more guidance and information, please contact any our Leadership Team.