The IRS issued new guidance April 30 evening clarifying how the expenses paid with the loan proceeds through the Paycheck Protection Program are to be treated for tax purposes.
According to the IRS, the forgivable portion of a PPP loan will not be included as gross income and will not be subject to taxation. However, any expenses paid for with PPP loan funds will not be tax deductible. The purpose of this guidance is to prevent a double tax benefit.
While no deductions can be taken on expenses paid for using PPP funds that are forgiven, any expenses paid for with PPP funds not forgiven can be deducted.
As you know, a borrower is eligible for loan forgiveness of PPP funds incurred and payments made during the 8-week covered period after the origination date of the loan. The loan proceeds must be used for payroll costs, interest on any covered mortgage obligation, rent or utilities.
According to the CARES Act, at least 75% of the PPP loan must be used for payroll expenses and 25% percent must be used for interest, rent or utilities in order to qualify for forgiveness. Any loan proceeds used for other purposes would not be forgiven and would have to be repaid over a 2-year period at a 1% interest rate.
The loan forgiveness amount can be reduced if the number of employees and wages is lower than the average number of full-time equivalents a business had either in the period between February 15, 2019 and June 30, 2019, or the period from January 1, 2020 to February 29, 2020.
Specifically, the loan forgiveness is reduced by the amount of any reduction in total wages of any employee during the 8-week covered period that is in excess of 25% of the total wages of the employee during the most recent full quarter before the covered period.
This guidance has not been without controversy. A bipartisan group of lawmakers introduced legislation just a few days later to effectively reverse this guidance and enable small businesses to deduct their expenses even if they have received a PPP loan. That legislation is still working its way through Congress, so at this time, the IRS guidance stands.
As you can see, the details of the PPP loans and the CARES Act continue to evolve. We will continue to monitor the guidance coming from Washington to keep you informed and provide you superior advice as we move through these uncharted waters together.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.
