On April 30th 2020, the IRS released Notice 2020-32 to address the tax treatment of wages and other qualified expenses paid for using PPP loan proceeds. According to the Notice, expenses for which PPP proceeds have been used will NOT be tax deductible to the extent those proceeds have been forgiven. Under the CARES Act, the forgiven portion of the loan is not included in Federal gross income, however, by making these expenses nondeductible, the forgiven portion is indirectly being taxed. This notice details the Internal Revenue Service’s interpretation of the current law as it stands. It is unlikely that the IRS is going to change its interpretation, absent a Congressional legislative action. Guidance has yet to be issued by individual states regarding the state tax consequences of PPP loan forgiveness and related expenses.
For example: A business obtains a $1 million PPP loan. Within 8 weeks of receiving the proceeds, the business spends $775,000 on payroll and $225,000 on rent and covered utilities. Assuming no change in FTEs or reduction in wages, they will have $1 million of the loan forgiven and cannot deduct the $775,000 of wages and $225,000 of rent/utilities for tax purposes. The income and expenses wash for a net effect of zero. However, if the business was going to pay some or all of those expenses regardless of receipt of the PPP loan, the business is losing out on the tax savings. Assuming a 20% tax rate and assuming the business would have paid all expenses regardless of receiving the PPP loan, rather than receiving a $1 million benefit, they are receiving an $800,000 net benefit ($1 million in expense savings, less the $200,000 tax savings lost due to losing the expense deductions).
We encourage you to reach out to a member of the TBC team with any questions.
Disclaimer: This post was current as of the date of posting. Any changes made to the law or regulations since original posting has not been incorporated. Please view the recent postings for current information or contact us directly with any questions.