A controversial position taken by the IRS in the recently issued Notice 2020-32, which addressed the deductibility of expenses that result in the forgiveness of PPP loans, has caused intense reactions from many bipartisan congressional leaders and taxpayers alike, and especially business owners large and small who are most likely to benefit from the Paycheck Protection Program (PPP) provided under the CARES Act.
In summary, to help businesses cope through the hardships as a result of the recent COVID-19 pandemic, Congress created the PPP, pursuant to which employers of Private and Public Companies may obtain loans for covering essential business expenses during the COVID-19 pandemic. The recipients of PPP loan may receive loan forgiveness on the eligible operating expenses paid during an eight-week period beginning on the date of loan’s origination. While the CARES Act did state that the loan forgiveness income would not be subject to income tax it did not specify whether the expenses that resulted in PPP loan forgiveness will be deductible for tax purposes. Subsequently, the IRS took its stance and addressed this issue in Notice 2020-32, in which the Service concluded that if the payment of the business expense results in the forgiveness of a PPP loan, those expenses will not be deductible for tax purpose. The IRS claims that this treatment prevents a double tax benefit of receiving excludible loan forgiveness income while simultaneously deducting the expenses used with the loan proceeds, and it is also compliant with Section 265(a)(1) of the IRC, which states that no tax deduction is allowed for expenses that are attributable to tax exempt income.
However, many tax experts have argued that the Notice results in a tax implication that seems controversial to the original intention of the CARES Act, which was to provide economic and tax benefits to businesses. This disagreement brought up the need for further guidance on the issue. In fact, a bipartisan group of congressional leaders, headed by Chuck Grassley and Richard Neal, the chairmen of the top tax committees, formally alerted the IRS that they “believe the position taken in the IRS Notice ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.” In addition, the Small Business Expenses Protection Act of 2020 was introduced in the Senate on Tuesday May 5th that would overrule IRS Notice 2020-32 and clarify that ordinary expenses funded by the PPP loans are deductible. The bill is currently being reviewed in the Senate Finance Committee and is supported by many important voices of the industry, including the American Institute of Certified Public Accountants (AICPA).
There are currently supporters on both sides of the issue, and the ultimate result as well as its consequences lay in the hands of our congressional leaders. Savvy business owners and taxpayers are advised to stay fully aware for any changes that might come sooner rather than later.
If you have any questions regarding the IRS Notice 2020-32 or the Small Business Expenses Protection Act of 2020 and how they might impact you and your business, or require any other assistance with your tax planning and compliance needs, please call or email one of our knowledgeable team members