Paycheck Protection Program Update No. 2020-06

SBA extends safe harbor for returning PPP funds

The U.S. Small Business Administration (SBA) has extended the safe-harbor period for returning Paycheck Protection Program (PPP) funds by one week to May 14th. The SBA initially provided a May 7th deadline for returning funds for companies that received PPP funds but later found that they were unable to certify in good faith that their PPP loan was necessary.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) offers few guidelines for the loan program, and simply states that a taxpayer must self-certify that current economic uncertainty makes the loan request necessary to support the ongoing operations of the business.

The guidance issued Tuesday stated that the extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA also noted that it intends to provide additional guidance on how it will review the loan necessity certification prior to May 14th.

PPP Expense Deductions

The IRS last Thursday issued Notice 2020-32, which stated that taxpayers receiving loans through the PPP are not permitted to deduct normally deductible expenses to the extent the expenses were reimbursed by a PPP loan that was then forgiven.

Legislation introduced in the Senate on Tuesday would overrule Notice 2020-32 and clarify that ordinary expenses funded by Paycheck Protection Program (PPP) loans are deductible by taxpayers. The bill, the Small Business Expenses Protection Act of 2020, S. 3612, is currently in the Senate Finance Committee and is supported by the AICPA.

The AICPA believes strongly that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent. Chris Hesse, CPA, chair of the AICPA Tax Executive Committee, said: “In effect, the IRS guidance means that the taxability provision [Section 1106(i)] has no meaning. Why waste the ink to say that for purposes of the Code, the loan forgiveness is not includible in income, if the government will just take away deductions in the same amount?”

The IRS, for its part, maintains that its position in Notice 2020-32 “prevents a double tax benefit.”  However, Congressional bipartisan leaders are concerned as the purpose of the PPP loan initiative, they argue, was to provide economic—specifically tax—benefits to businesses in order to make it possible to keep workers on the payroll.  As the legislative leaders put it: “Providing assistance to small businesses, only to disallow their business deductions as provided in Notice 2020-32, reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income.”   

We will continue to monitor the ever-changing regulations and guidance on the PPP and provide updates as new guidance is released.