Question

• The Treasury Department has released funds under the PPP Act as “loans” which may not need to be repaid. Should this be taxable to the businesses? Should the expenses that they pay with these funds be non-deductible? There seem to be more questions than answers.

Answer 1

Section 1106 of the CARES Act, states that borrowers of a PPP loan are eligible for forgiveness of up to 100% for the costs incurred and payments made during the eight-week period (the “covered period”) after the loan origination date for payroll costs and mortgage interest, rents and utilities. Amounts forgiven are excluded from a borrower’s gross income. The amount of the forgiveness may be reduced if, during the covered period, there are reductions in the number of full-time employees and the wages and salaries of certain employees. In addition, the CARES Act provides that no more than 25% of the amount forgiven can be attributable to non-payroll costs. Any of the covered loan that is not forgiven remains outstanding under the terms set forth in Section 1102 of the CARES Act.

The IRS released Notice 2020-32 which clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan under the CARES Act. The income associated with the forgiveness is excluded from gross income. The expenses supporting the forgivable amount of the loan become non-deductible under this IRS Notice, in effect, the forgivable portion of the PPP becomes taxable. In other words, the result is the forgivable amount = non-deductible expenses, and therefore the impact is net zero to taxable income.