The rules between the paycheck protection program and tax deduction

The rules between the paycheck protection program and tax deduction

Last April 30, 2020, the IRS Notice 2020-32 was issued, and according to it, there should be no deductions for qualifying business loans that are under the Paycheck Protection Program (PPP loans) for otherwise deductible expenses of businesses. Under certain circumstances pursuant to the program, such loans would be later forgiven. 

Payroll expenses which can be considered as a deductible expense (and many more) are where the disallowance of the deduction applies as long as they were paid using the proceeds of the PPP loan. Or to satisfy the conditions of the PP Loan forgiveness, enabled the trade or business. Up to a certain amount forgiven, the deduction disallowance shall apply to the scope of the resulting PPP loan forgiveness.  

Under Notice 2020-32, the amount of the loan forgiven by the value of the taxpayer of the tax deductions disallowed to the business should be lower than the value of the benefit of a forgiven PPP loan amount is what the disallowance of such deduction means. If you have a business and are deciding whether to ask for forgiveness of a PPP Loan (rather than paying it back) or to apply for a PPP Loan, a factor that you should consider is the tax cost added to it and not being able to deduct these expenses. 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) introduced the Employee Retention Tax Credit, but you should note that when you apply and acquire a PPP Loan, you won’t have a chance to claim the credit. For purposes of the Employees Retention Tax Credit, if the business repaid the PPP Loans by May 14, 2020, they will be treated as though they had not received a covered loan under the PPP loan program, this is pursuant to the guidance and rule recently issued by the U.S. Small Business Administration (“SBA”) and Treasury. Therefore, businesses will be considered an “eligible employer” for the purpose of the credit if they were able to repay their PPP Loans by May 14, 2020, and such businesses will be eligible for the credit.

“Eligible businesses'' (as defined under the program) can have a PPP loan to be used to pay certain business expenses such as mortgage interests, payroll costs, utility, and rent payments. The PPP loan program is administered by the SBA and was established by the CARES Act. If the business was able to establish that 75% of its PPP loan proceeds to reinstate or retain all of its full-time employees, their salaries as compared to a prior period, or for payroll costs during the 8-week period after the business received the loan then such loans may be forgiven considering they established what was mentioned above. You can check out the Congress Passes CARES Act: Overview of the Relief Available to Small and Other Business Concerns if you want to know more information regarding the PPP Loan program. 

The borrower business’ (or its owners) loan proceeds forgiveness are not going to be taxable according to the program. However, getting the tax benefit of the tax deduction for deductible business expenses was not yet clear for such businesses (or their owners). In the form of such as forgiven loan amounts deductible business expenses (such as payroll expenses) are allowed to tax-exempt income. This issue was clarified by the Notice 2020-32 and it also stated that such deductions are disallowed.

Senior-level Congressional tax legislators reviewed the Notice 2020-32 and they claimed that there is bicameral / bipartisan support for a fix. Bipartisan legislation (The Small Business Expense Protection Act of 2020(S. 3612)) was introduced by ranking member Sen. Ron Wyden (D-OR) and Senate Finance Committee Chairman Chuck Grassley (R-IA)  on May 6, 2020. This legislation permits businesses that have received PPP Loans to deduct covered expenses. Secretary Mnuchin indicated opposition to this legislation even if the bill clarifies that the Congress wants expenses associated with the small business program to be tax-deductible. It remains to be seen whether the IRS will act first in what manner or if lawmakers will be able to include the language in the next relief package since the negotiations between lawmakers and the IRS are ongoing. 

You should consider seeking legal advice from a tax professional when you are in doubt.

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