Paycheck Protection Program (Update)

On Thursday, April 30th, the IRS released guidance stating that any expenses (salaries, health insurance, utilities, rent) paid from Paycheck Protection Program (PPP) forgivable loan funds will not be tax-deductible.

The IRS released guidance (Notice 2020-32) to explain that a taxpayer that receives a loan through the PPP is not permitted to deduct expenses that are ordinarily deductible under the Code, to the extent the expenses were reimbursed by a PPP loan that was then forgiven. Under the PPP, a small business loan program created as part of the third, $2.2 trillion coronavirus relief bill, small businesses wouldn’t have to repay the low-interest loan they received as long as the loan went to essential expenses such as maintaining payroll. Usually, wages are deductible expenses and forgiven debt counts as taxable income.

The notice explains that, although the expenses paid by the PPP may be deductible under Sec. 162 as trade or business expenses or under Sec. 163 as interest, Sec. 265 disallows a deduction to a taxpayer for any amount otherwise allowable as a deduction to the taxpayer that is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) that is wholly exempt from the taxes imposed by Subtitle A of the Code. The purpose of Sec. 265 is to prevent a double benefit by preventing a deduction for excluded income.

Other ramifications of the CARES Act provisions are still evolving and continuing guidance from the Treasury Department is likely to affect interpretation and administration. The American Institute of Certified Public Accountants (AICPA) has called upon the Treasury and the SBA to immediately release guidance on PPP loan forgiveness calculations. The lack of available guidance on the loan forgiveness calculations makes critical decisions such as employee retention very difficult.
 
Additionally, in the past few days, concerns have arisen that PPP loans have been made to entities that did not truly need the funds to sustain their businesses. While the bar for “need” was set quite low, the stated intent of the program was to get money in the hands of businesses who needed the funds to keep people employed. To this end, on April 28th, the SBA issued an Interim Final Rule  offering a “limited safe harbor” window to borrowers who borrowed more than they “need,” and who based their loan application on the ambiguous instructions that were available at the time they applied. The Interim Final Rule, states “Consistent with section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that ‘‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’’”  Borrowers who determine that they do not meet the “needs” certification have through Thursday, May 7 to return the money without ramifications. Additionally, the SBA has stated that it, in consultation with the Treasury, will review all loans in excess of $2.0 million, in addition to others as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. We will continue to keep you updated as further guidance is released.