In response to the economic crisis caused by the Coronavirus, Congress enacted the CARES Act, which stands for The Coronavirus Aid, Relief, and Economic Security Act. One of the functions of the legislation was to authorize two trillion dollars in economic stimulus in hopes of offsetting some of the hardships Americans are facing.
A portion of those funds are provided to businesses through the Paycheck Protection Program (PPP). PPP loans are forgivable if the loan proceeds are used for the payment of rent and wages during the subsequent 8 weeks after receiving the loan. The purpose of the PPP is to allow businesses to keep employees that they might otherwise have needed to lay off, thereby mitigating some of the economic damage caused by the Coronavirus.
Generally, loan forgiveness creates taxable income, known as “cancellation of debt” income. However, Congress specifically excluded PPP loan forgiveness from being included in the income of the recipient. This seemingly provided for a tax-free government grant, allowing small businesses further relief in a challenging and uncertain economic climate.
However, that thinking was too good to be true. On April 30, 2020, the IRS issued Notice 2020-32, regarding deductions for expenses from PPP loan proceeds. In the Notice, the IRS states that if an expense leads to PPP loan forgiveness (such as rent or payroll), then that expense cannot be deducted from gross income. In essence, this is a back-door tax on the PPP loan, designed to prevent a double tax benefit. Following the release of the Notice, a few congressmen have expressed concern that the IRS’ treatment of the tax consequences of the PPP loans is inconsistent with the PPP’s intent. House Ways and Means Committee Chair Richard Neal has indicated that the next legislative response to the Coronavirus could include a fix to correct the IRS’s treatment of PPP loans.
Check back with us to stay up to date on how this legislation might affect you and your business.