May 4, 2020
The bevy of news, updates, and activity around the Paycheck Protection Program has come at a lightning-fast pace over the last few weeks. This has included guidance on eligibility, application, terms, and conditions, and even about loan forgiveness. When the program exhausted its funding, special attention was given to Congressional efforts to extend it to permit more businesses the opportunity to participate. This culminated with the Paycheck Protection Program and Health Care Enhancement Act which allocated an additional $370B in funding. When applications were again accepted by the SBA on April 27, 2020, the focus on loan forgiveness steps and best practices intensified. Last week, on April 30th, the IRS issued Notice 2020-32 which offers important guidance on related tax issues. To help clients, prospects, and others, Wilson Lewis has provided a summary of the important information below.
As outlined in the Treasury Department’s Paycheck Protection Program – FAQs, the program provides qualified applicants with an amount equal to 2.5 months of funding based on prior-year payroll. The number of funds used for qualifying expenses including payroll costs, rent, mortgage, and utilities over the 8-week period, beginning on the date of disbursement is eligible for forgiveness. In addition, the loan funds are not taxable and therefore do not need to be included as part of 2020 gross income.
None of the above is really anything new, but the recently issued IRS Notice changes business expense deductions. It states that no deduction is permitted for an expense that was included as part of the loan forgiveness. This means that borrowers who used loan proceeds to cover payroll costs will not be able to deduct this amount, and therefore, will have an unexpected increase in gross income. This is an important point because impacted businesses need to adjust their tax planning process to accommodate the change.
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While it is unclear if Congress will get involved to change the IRS guidance, it is important for businesses seeking loan forgiveness to assess the impact on their 2020 taxes. If you have questions about the information outlined above or need assistance with a COVID-19 tax or funding issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.