Your NPA Team GRC follows developments related to the CARES Act on a daily basis. Late on May 1, 2020 we focused on IRS guidance covering the deduction of business expenses for payroll, rent, and the like if the employer received actual loan forgiveness under the CARES Act and its authorization of the Paycheck Protection Program (PPP) loan program. Some commentators have described IRS’ position as “raining on employers’ parades.” We believe all NPA members should be aware of the choice between loan forgiveness and expense deductions the IRS seems intent on requiring.
IRS Notice 2020-32 focuses on the deductibility of “covered loans” – loans that many pawnbrokers were able to get under amended section 7(a)(36) of the Small Business Act, 15 U.S.C. 636(a)(36). The basic rule is the business expenses that otherwise would be deductible will no longer be deductible if payment of the expense(s) results in eligibility for loan forgiveness of a “covered loan” and the income associated with the forgiveness is excluded from gross income for the purposes of section 1106(1) of the CARES Act.
Recipients of “covered loans” may use loan proceeds to pay:
- Payroll costs,
- Certain employee benefits relating to healthcare,
- Interest on mortgage obligations,
- Utilities, and
- Interest on any other pre-existing debt obligations.
The SBA has issued four interim final rules since enacting the March 27, 2020 CARES Act. The interim final rule (SBA regulation) of April 15, 2020, which is available at 85 Federal Register 20811, 20813-14, clarifies that no more than 25 percent of loan amounts eligible to be forgiven may be expended to non-payroll costs as described above.
Today’s IRS Notice 2020-32 explains the Federal income tax consequences resulting from the forgiveness of covered PPP loans. Amounts that otherwise would be included in “gross income” because of loan forgiveness under the CARES Act “shall be excluded from gross income.” This CARES Act loan forgiveness is a huge boon to PPP loan recipients, especially because the loan forgiveness under the PPP is not – repeat NOT – considered as “income.”
However, IRS Notice 2020-32 makes it clear those employers who qualify for “loan forgiveness” of their PPP loans–whether in full or in part–may not enjoy both loan forgiveness and a deductible business expense. The recipient employer can have either loan forgiveness or a deductible business expense for the same expense item. The recipient employers may not have a double tax benefit.
The link to IRS Notice 2020-32 is https://www.irs.gov/pub/irs-drop/n-20-32.pdf
Members should consult their own lawyers for legal advice.
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