On Thursday April 30th, the IRS issued Notice 2020-32 to provide guidance on the tax effect of Paycheck Protection Program (PPP) funds. PPP provides funding based on 2.5 months of the prior year’s payroll. The amount of the funds used for Payroll, Rent, Utilities, and certain other expenses over an eight week period are forgiven. The funds are not taxable; however, the Notice now clarifies that no deduction is allowed for an expense that results in forgiveness under section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
In other words, while the proceeds of the CARES Act are not taxable, the company utilizing them will lose out on deductible expenses. For example, a company with $100,000 per month in covered payroll that receives a PPP loan of $250,000. If they utilize the PPP to cover $250,000 of allowable expenses in the first 8-weeks, that amount will be forgiven. However, that company will not be able to deduct that $250,000 in forgiven costs on their 2020 tax return.
Since that CARES Act limited the ability to take both a PPP Loan and certain employee retention credits, for some taxpayers that missed out on the PPP the difference might not be as great as first considered.
Please contact Chris Iannuzzi or your IMC tax professional for a further discussion.