If you have received a loan as part of the Paycheck Protection Program (PPP), you may be confused by the conflicting information circulating about how the funds you have received and utilized will be treated by the Internal Revenue Service (IRS), and what expenditure will qualify for forgiveness when the time comes.
The CARES Act made clear that the amount forgiven will not be considered gross income, which is a useful added benefit for small businesses. However, the IRS issued an update yesterday (April 30, 2020) clarifying what expenses could be deducted from federal income tax for expenses paid with forgiven PPP loan funds.
As we have previously outlined, certain criteria need to be met for loans to be forgiven. Loans can be forgiven up to 100% of the borrowed amount if:
- Proceeds of the loan, incurred before February 15, 2020, and paid over the eight-week period from when the loan originated, are used for the following:
- Payroll expenses;
- Continuation of group health care benefits;
- Mortgage interest;
- Rent on leased facilities;
- Utilities; and
- Interest on any other debt obligations.
- Employee headcount and compensation levels for employees earning less than $100,000 are maintained.
- Not more than 25% of the loan forgiveness amount is used for non-payroll costs.
The IRS update states that you cannot make a deduction of an expense incurred in trade or business that would otherwise be deductible if you used forgivable funds from the PPP to pay it and it was part of the excluded gross income. When the PPP was created, Congress had the foresight to exclude any forgiveness of the loan from gross income for federal income tax purposes. This was to maximize the use of funds for struggling businesses. However, after the tax code was reviewed, it was determined that this would amount to a double benefit.
The rules governing the CARES Act and the PPP are subject to change as they are reviewed and the COVID-19 disruption continues. This is the information we have as of today (May 1, 2020). If you need tax advice or help interpreting the Internal Revenue Code, please email anyone on the Rooney Nimmo COVID-19 support team: Elannie Damianos, Allan Rooney, Tim Davis , Abbey Docherty or Charles Arrowsmith or call us on 212 545 8022.
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