Overview
Action Item
- Review our In-Depth: CARES Act Tax Provisions.
The Internal Revenue Service (IRS) recently issued additional guidance to address certain questions related to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) and the Employee Retention Credit enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Notice 2020-32
On April 30, 2020, the IRS published Notice 2020-32 (the Notice), which provides that certain business expenses that result in loan forgiveness under the PPP will not be deductible for tax purposes. In particular, the Notice states that no deduction is allowed for any expense paid with PPP loan proceeds if (1) the payment of the expense results in forgiveness of a PPP loan under Section 1106(b) of the CARES Act and (2) the income associated with the forgiveness is excluded from gross income pursuant to Section 1106(i) of the CARES Act.
Since forgiven PPP loan proceeds are tax-free, the IRS argues that its position prevents a “double tax benefit” and is consistent with Section 265(a)(1) of the Internal Revenue Code and Treasury Regulation Section 1.265-1, which generally prohibit tax deductions for expenses that are paid with tax-exempt dollars.
This deduction disallowance offsets the benefit of the Section 1106(i) gross income exclusion under the CARES Act and puts taxpayers in the same (and in the case of some insolvent taxpayers, potentially worse) position they would have been in if PPP loan amounts received were instead includible in gross income and subject to tax. As Congress had expressly excluded the PPP loan amounts from gross income, the IRS’s position appears contrary to legislative intent and has been controversial. A bipartisan push in Congress is currently being made to override the IRS in its denial of these deductions.
Employee Retention Credit Clarification
The IRS also recently added FAQs to address several questions specific to the Employee Retention Credit under the CARES Act. The IRS further clarified the interaction of the PPP with the Employee Retention Credit in FAQs (updated May 7, 2020). According to the FAQs, if an employer repays its PPP loan by May 14, 2020 (originally May 7, 2020) in accordance with rules issued by the SBA, the employer will be treated as though it had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the Employee Retention Credit provided the employer is otherwise an “eligible employer.”
COVID-19 Resources
We recommend reviewing the following pandemic-related business and legal considerations we have been discussing with our clients:
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Contact us with any questions. We are here to assist you with evaluating the tax provisions as they pertain to your organization.