The Internal Revenue Service this month released guidance to clarify the accounting treatment of payments under the Paycheck Protection Program and has caused some consternation among some small businesses and tax experts. Many business owners who applied for P3 loans expected the loans to be canceled as long as their employees were paid for eight weeks and businesses could recoup their expenses as they traditionally have been able to do. . The guidelines cast doubt on this.
Notice 2020-32 states that no deduction is permitted under the Internal Revenue Code for an expense that is otherwise deductible if payment of the expense results in the cancellation of a loan covered under the CARES Act. Income associated with the discount is excluded from gross income.
Under section 1106 (b) of the CARES Act, a beneficiary of a covered loan may be granted debt relief on the loan in an amount equal to the sum of the payments made for the following expenses: personnel costs, any payment of interest on the entire mortgage obligation, any payment on any covered rental obligation and any covered utility payment – during the eight-week “covered period” beginning on the inception date of the covered loan .
The Paycheque Protection Program was designed to provide economic relief to businesses in the aftermath of COVID-19. If the requirements of Section 1106 (b) are met, PPP products are excluded from taxable income and the corresponding PPP expenses which are primarily reimbursed are not tax deductible although they are classified as ordinary expenses under the article 162 of the General Tax Code. Thus, PPP funding is tax-exempt “cleanup” – PPP expenses are not tax deductible to the extent of tax-exempt PPP income. Since “PPP salaries” are currently not tax deductible under the program, it will be interesting to see how companies are asked to prepare for W-2s for 2020.
The CARES Act provides for the payment of fees out of PPP funds for processing applications on a sliding scale starting at a rate of 5 percent for loans up to $ 350,000. These fees are generally reserved for banks and other financial institutions despite the expectation that many accounting and legal professionals would be eligible for these fees for services rendered in helping clients generate necessary documents throughout the application process. Banks receive tens of millions of dollars in PPP fund fees to process loans for which they are risk-free. Banks also charge a transfer fee on PPP funds when these products are transferred to commercial accounts.
The CARES Act dunning checks were processed based on Form 1040 filings – essentially bypassing an application process. Likewise, PPP funding might be more efficiently disbursed if allowances were based on past Form 941 filings instead of evaluating the same payroll information through an expensive application process. Another relief measure would be to allow companies to benefit from tax deductions for PPP expenses despite the tax-exempt nature of PPP products.