Beware - PPP Loan Forgiveness is Taxable

Jim Moore, CPA, Principal (Sep, 2020)

September 29, 2020 - The Paycheck Protection Program (PPP), created as part of the Cares Act signed into law on March 27, 2020, has provided loans to many businesses impacted by the COVID-19 pandemic. These loans are forgiven if the proceeds are used for qualified business expenses.

In general, the forgiveness of debt is included in gross income. However, Congress went out of their way to provide specific language in the Cares Act stating that forgiveness of the PPP loan shall be excluded from gross income. With this language, it is clear that Congress intended to provide as much liquidity as possible to help businesses adversely impacted by the pandemic.

However, on April 30, 2020, the IRS issued Notice 2020-32, which provides that any expense paid and used in the determination of the PPP loan forgiveness will NOT be deductible.  This notice, that now disallows expenses that would otherwise be deductible, effectively makes the PPP loan forgiveness taxable. In the following illustration, assume a business has received PPP loan proceeds of $200,000:

 

Congressional Intent

IRS Notice 2020-32

Increase

Gross Income

$500,000

$500,000

 

Expenses Paid

($400,000)

($400,000)

 

PPP Loan Expenses

Not Deductible

_______

$200,000

$200,000

Taxable Income

$100,000

$300,000

$200,000

Income Tax at 30%

$30,000

$90,000

$60,000

 

In order to have the $200,000 loan forgiven, the entire proceeds of the loan must be used to pay for qualified business expenses. Because of Notice 2020-32, there will now be a $60,000 income tax liability. With all loan proceeds having been expended, where does the cash come from to pay the tax?

Numerous members of Congress immediately reacted by condemning the IRS Notice including Senate Finance Committee Chairman Chuck Grassley who said, “unfortunately Treasury and the IRS interpreted the law in a way that is preventing businesses from deducting expenses associated with PPP loans. That is just the opposite of what we intended and it should be fixed.” House Ways & Means Committee Chair Richard Neal expressed plans for legislation to override the notice.

The HEROES Act, passed by the House on May 15, 2020, includes language that would clarify that expenses paid with PPP loans proceeds would be deductible. However, the Senate has failed to adopt any similar law.

Absent a rescission of the notice by the IRS or future Congressional action that will override the provisions of the notice, businesses must be aware of the income tax and cash flow consequences of PPP loan forgiveness as a result of the adverse consequences of IRS Notice 2020-32, which clearly undermines the intent of Congress.  

If you have any questions, or if you would like to speak with one of our tax professionals regarding PPP Loan Forgiveness, please contact us at (315) 471-9171.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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