Earlier this year Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses that were adversely affected by COVID-19 to continue to pay their employees. Under the CARES Act, borrowers are eligible for forgiveness of funds if the funds are spent on eligible expenses, such as payroll, rent, and utilities, during the 24 weeks after disbursement, or until the end of the year, whichever is earlier.
Although the PPP Loan Forgiveness is a huge subsidy for many businesses during this hard time, it does come with a few downsides. One of which concerns the position of the IRS regarding the deductibility of expenses paid using the PPP Loan. In IRS Notice 2020-32 that was issued earlier this year, the IRS took the position 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. In virtually all cases, this stance makes the loss of PPP expense deductions a mathematical equivalence of taxing the PPP loan forgiveness itself, and this has caused much frustration among PPP loan recipients and taxpayers alike.
Many tax professionals and organizations, including the American Institute of Certified Public Accountants (AICPA), have been advocating for a Bill against the position of the IRS because it is against the original intention of Congress. After a several months of uncertainty, Congress has finally taken actions to address the issue. Last Sunday, congressional leaders reached an agreement on a COVID-19 relief bill that includes a long anticipated provision with regard to the deductibility of PPP expenses. The provision would officially reverse the IRS stance discussed above and allow PPP loan forgiveness recipients to deduct the all PPP expenses while the forgiveness itself remains nontaxable. While nothing has been finalized yet, it is expected that the new COVID-19 relief bill will be passed into law the beginning of the week and will give taxpayers the tax break that has been expected.
Beside PPP loan forgiveness, the $900 billion Bill also includes many other measures long expected by the business community, including:
- A $600 stimulus check for each adult and $600 for each dependent as opposed to $1,200 and $500, respectively, in the first round;
- Unemployed individuals would be eligible for a $300-a-week federal unemployment subsidy;
- The proposed bill provides $25 billion of assistance to tenants who are behind on their rent, and it also extends the “federal eviction prohibition,” until the end of January 2021. Landlords and building owners may apply on behalf of their eligible tenants;
- A new round of PPP loans with about $284 billion funding;
- A $20 billion for the Economic Injury Disaster Loan Program;
- A $15 billion support program for live music venues, movie theaters and museums that have experienced “significant” revenue loss.
- $13 billion to support crop farmers, cattle ranchers and rural communities;
- The bill would also extend a tax credit for struggling employers who keep their employees on payroll along with other energy-efficient credits.
We will continue to stay on the lookout as Congress is voting on the issue and will share more details as well as our analysis on how the new Bill might apply to taxpayers once everything is finalized. If you have any questions regarding the PPP Loan Forgiveness and the Covid-19 Relief bill and how they might impact you and your business, or require any other assistance with your tax planning and compliance needs, please do not hesitate to contact one of our knowledgeable team members.