The forgiveness of the Paycheck Protection Program (PPP) was deemed as nontaxable by the CARES Act. However, last night, 4/30/2020, the IRS released IRS Notice 20-32 which provided guidance that the expenses used to document and earn forgiveness for the PPP loan would be considered nondeductible for tax purposes. There had been much speculation about whether the expenses related to the PPP forgiveness would be deductible or not.
Many members of Congress have publicly stated that their intent was to allow those deductions to be deductible for businesses and not disallowed, essentially creating a benefit for tax purposes. The IRS has taken the opposite stance on the deductibility of the expenses. Under this notice, the IRS is treating the expenses relating to PPP forgiveness under IRC §265(a)(1). Section 265 provides that no deduction is allowed to a taxpayer for any amount otherwise allowable as a deduction to such taxpayer that is allocable to one or more classes of income other than interest wholly exempt from the taxes imposed b subtitle A of the Code. Essentially, this means the expenses relating to tax-exempt income. The purpose of section 265 of the Code is to prevent a double tax benefit. Here are some examples of how this could affect your business or Schedule C:
- For those taxpayers suffering a significant decline in revenue and net income due to COVID-19, this may not create an unexpected tax liability. This is because if revenue is down and the expenses used to document PPP forgiveness cannot be taken, it is likely that in terms of tax liability, the disallowance of the expenses will be a wash.
- Those taxpayers who are not seeing a significant decline in net income due to COVID-19 or had similar net income to the prior year will likely see a negative effect from the disallowance of these expenses. Because of the disallowance of the expenses, net income will increase potentially causing the taxpayer to have an increased tax liability compared to the prior year and larger than what was expected.
This notice from the IRS places the ball back in the court of Congress to pass additional legislation to ensure the forgiveness of the PPP is executed as they had originally intended. Sciarabba Walker will keep our clients up to date on any future legislation affecting this program.
If you have any questions, please contact your personal Sciarabba Walker contact or email us at info@swcllp.com.