On Thursday, April 30th the IRS issued Notice 2020-32 which clarified the treatment of expenses paid with funds forgiven through the Paycheck Protection Program (PPP).
Most taxpayers incorrectly assumed that businesses receiving a PPP loan which was forgiven would not have to pay tax on the loan forgiveness and would also get the benefit of deducting the expenses paid for with the loan proceeds.
The consequence is that the PPP loan forgiveness would be taxable since it eliminates deductions. For instance, if you receive a PPP loan of which $10,000 is forgiven because you used the funds to pay “covered expenses” allowed by the CARES Act (generally eligible payroll costs, rent, utilities and mortgage interest) then you will not be able to deduct those “covered expenses”.
For those that have a sharp reduction in income, this should not be a problem. In effect, no income and no deductible expenses.
For those companies that utilize the loan and a very small reduction of income, then there may be a small amount of taxable income.
As a lot of businesses will be “ramping up”, and hoping to restore close to reasonable income levels, this should not result in a tax problem.
Tax year 2020, will be very interesting.
I recommend that in November and December, all my small business clients review their year to date income and expenses so that an “adequate” Estimated Payment January 15, 2021, be made.Enter your text here...
PPP Forgiveness Expenses NOT Deductible
May 5, 2020