If you have received Paycheck Protection Program (PPP) funds, you should be aware that the IRS has issued a notice that will increase the cost of using those funds. According to IRS Notice 2020-32:
Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
What does this IRS ruling mean?
Normally businesses can deduct business expenses such as costs for payroll, mortgage interest, rent and utilities. But, if you received a PPP loan and use the funds properly on those four types of expenses so that your PPP loan is forgiven, the amount you spent on those expenses from PPP funds will no longer be deductible.
Why would the IRS make this rule?
According to the IRS, they are trying to prevent small businesses who receive PPP funds from getting what the IRS sees as a double tax benefit on the same dollars. Normally when a loan is forgiven, the amount forgiven is counted as taxable income to the taxpayer. In the CARES Act, Congress specifically provided that the amount of PPP loan forgiven will NOT count as taxable income. So, the IRS sees that special tax exemption as one tax benefit. According to the IRS, if a small business were also able to deduct the amount of PPP funds they spent to make the loan forgivable, then the deduction would be a second tax benefit on the same dollars.
The rule seems inconsistent with the intent of Congress.
While the IRS’s ruling in Notice 2020-32 is consistent with how exemptions and deductions are normally handed, it seems to run contrary to the intent of Congress in the CARES Act. Given that Congress specifically provided that PPP loan forgiveness would not be counted as taxable income, it seems the intent of Congress was to provide small businesses with rescue funds without adverse tax consequences. So, it will be interesting to see if Congress takes action to stop the adverse tax consequences the IRS just announced.
What does this mean for your business?
This ruling means that the cost of using your PPP funds will be higher than you likely anticipated. If all or part of your PPP loan is forgiven, you will lose tax deductions on the business expenses you paid as directed by Congress and the SBA to make your PPP loan forgivable.
The Finney Law Firm will continue to stay on top of the latest PPP guidance and provide updates on our blog. If you have questions, feel free to contact Rebecca Simpson Heimlich (513.797.2856).