IRS provides some clarity on PPP; member action now needed

By Greg Saul, Esq., CAE, OSCPA tax policy director

The IRS has brought clarity on the deductibility of expenses paid with forgiven loan proceeds under the Paycheck Protection Program, and CPAs do not like the view.

The IRS and Department of the Treasury on April 30 released Notice 2020-32, taking the position that associated wages and other expenses paid with forgiven loan proceeds under IRC Section 265 are non-deductible.

It is essentially a policy reversal. The CARES Act (H.R. 748) specifically excluded loan forgiveness from being subject to the income tax. However, IRS disallowing the expenses essentially makes the PPP loan forgiveness taxable anyway. One member commented on OSCPA’s recent virtual town hall meeting, “If the expenses are not deductible, then it’s the same as the income being taxed.”

Compounding the non-deductibility impact on PPP recipients is that Ohio enacted H.B. 197, effective March 27, to incorporate into Ohio tax law recent changes to the Internal Revenue Code and other federal law taking effect after March 30, 2018. Pursuant to FAQ #8 on ODT’s website, Ohio’s conformity with federal income tax law includes the CARES Act and its applicability to Ohio’s income taxes.

The Ohio Department of Taxation confirmed that because the wage expenses are not deductible at the federal level (by virtue of being paid by nontaxable, forgiven loans), and because Ohio does not have a specific deduction for wage expenses, they will be included in the income tax base for individuals and PTEs.

This is where we need your help! Please use our letter writing program to reach out to your federal lawmakers urging them to take action to reverse the IRS’s position. It’s very easy to use and will take just a few minutes. As before with the federal and state tax deadline extension efforts, the letters are just suggested drafts – please customize with your own personal or client’s examples. Please write your message now.

And as coronavirus-related continues to develop, refer to OSCPA’s resource page to stay informed.

19 comments

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  1. Belinda Grassi | May 08, 2020
    Those of us in nonprofit will account for the loan proceeds as grant revenue as the funds are spent.  While we won't have to deal with the taxability issue, we will be showing grant revenue.  If you were in business you'd have revenues generated to pay the employee wages and benefits.  Because you don't have revenue if you're not in business, the PPP loan is really revenue replacement.  You'd set aside money for taxes if you were in business.  Might want to consider doing the same here.  Even for taxable entities, grants awarded are considered taxable revenue streams.
  2. FF | May 07, 2020
    The biggest issue with this is in cases where businesses has brought back employees, that it otherwise would not have. with this money. Now they are out of pocket the income tax amount. So it is costing them money to take the PPP loan and pay employees. Also, if a schedule C business with no employees does this, there is no tax consequence, so unintended different results.
  3. VASCPA | May 07, 2020
    Agree with NJS with the simplest statement - As the IRS is limiting deductions only on the expenses paid with FORGIVEN loan proceeds and these proceeds are not taxable, it seems logical that the related expenses are not deductible. Which only seems fair to all of those businesses including mine that did not step in line to get FREE money as we are essential and have continued to operate for our clients. To say that we have not been impacted would be ridiculous, but I believe the funds were meant for those businesses that have had to close as non essential with no income and maintained payroll and responsibility for business expenses. Come on we're accountants here - business A has net taxable income of $100k and did not take the PPP loan and pays $21k in tax and business B received a PPP Loan that was forgiven for $100k and net income before deducting the PPP Loan expenses is $100k - so net taxable income is $0 and B pays no tax on essentially the same income - that makes no sense.
  4. Bill | May 05, 2020

    Its not a matter of if is a good deal or a bad deal.

    Congress intended the forgiveness of this debt to be non-taxable not the expenses its proceeds were used to pay to be non-deductible.

    Hopefully the fix this mess soon and tell us what they really meant to do.

     

  5. Anne | May 04, 2020
    I don't see it as a gift to small business. Many of them were going to lay off most of their staff. The government asked them not to. It benefits the administration to reduce unemployment and pushes administrative duties onto the small business that would have been the job of State Unemployment offices. Paying the business owner a small fee for doing that would have been very reasonable. Banks got $10B for administering risk-free loans. And the point of the CARES Act WAS indeed to help small businesses survive. The fact that some larger businesses abused it doesn't change that. Changing the rules midway through does change everything for the struggling business. Also, keep in mind the loan was for 2.5 months of wage cost but the forgiveness is only 8 weeks of payroll cost. Are they going to address that in favor of the business? We need these businesses to survive to help deliver this country out of this depression/recession as they have in the past. Overpaying them a tiny bit is the least of our problems.
  6. Bob | May 04, 2020
    Let's look at this situation from a tax perspective.  The purpose of the PPP program was to keep employees on the company's payroll.  It was NOT designed to financially help a business.  In its purest form, the government is simply reimbursing a business for the amount of payroll that it is paying for an employee that is no longer working for the company.  In this way, the company is theoretically more poised to begin operations when the pandemic lessens since it already has its employees in place.  It also reduces the burden on the State since that employee will not be applying for unemployment.  The government is paying the employee, NOT THE COMPANY.  From a tax perspective, there should be no income or deduction since the business expended no resources....the government paid the expense.  This is equivalent to a government grant to a business that uses the money for expenses.  Those expenses would be non-deductible since there was no economic outlay.  There are loan programs such as the EIDL meant to help businesses.
  7. RL | May 04, 2020

    I agree with most the comments that the expenses associated with amount of PPP forgiven should be non-deductible.  It is sound tax policy and reasonable.  The taxpayer is being given additional wealth and should be taxed on that.  The taxpayer always has the option to pay the money back.  The taxpayer is better off by the amount forgiven times 100% minus his tax rate (ie in the case of a corporation, forgiven amount times 79%)....a pretty good deal.

    I would caution the OSCPA pushing too hard on this issue.  First they should see how many of their members took the PPP amounts.  We are rated #2 as an industry behind the construction industry in groups taking the money.  I would guess that many of us as an "essential business" are not as impacted by the virus as industry such as restaurants etc.  Also many of us are working remotely and not impacted greatly.  Some are even enhanced from consulting on the program.  I would hope that the OSCPA would be concerned with the image of the profession being tarnished when it is disclosed who took these loans.  I would hope that this would be an ethics violation based on the certifications that are made when applying for the "loan"/"grant".

  8. Dave | May 04, 2020
    The president and congress indicated that these funds were supposed to help business owners keep employees on payroll since the government forced many businesses to close.  So many business owners are paying employees with these funds even though they aren't working.  So if a small business got a PPP loan for 100,000 and pays 100% to their employees they will not have any funds available to pay taxes.  The taxes could be as high as 52% if the business is a self-employed person and this doesn’t even count payroll taxes that will also be due.  Many business owners would have decided to reduce staff instead of accepting the PPP loan if they knew it was going to increase taxable income.  In reality the government is the party that gets a double benefit by collecting taxes on both the employees’ wages and on the PPP money used to pay them.  We need to ask congress if this was really their intent.  This would be a sucker punch to small businesses who are hanging on by a thread.
  9. NJS | May 04, 2020
    Seems the IRS is limiting deductions only on the expenses paid with FORGIVEN loan proceeds. As these proceeds are not taxable, it seems logical that the related expenses are not deductible.
  10. jerry walters | May 04, 2020
    For companies that are truly experiencing losses, take for example a restaurant with little to no revenue from Mid-March through June, the loan forgiveness that offsets the company having to deficit spend to maintain wages and rents and utilities, is a wash.  No expense recognition but no revenue (income) to recognize either because the business was effectively closed.  This is a win for that company and if were to be able to also deduct the expenses paid with the PPP loan proceeds (and still have the loan forgiven) then that business would receive a double benefit (forgiveness and expense recognition).  That was not the intent of the program.  Who this 'hurts' are companies that truly did not qualify for the program.  A business that may have only seen its sales fall off 10% or 15%.  Certainly that is a hardship but if your sales are off $100,000 and your business secured a PPP forgivable loan for $300,000, then you will lose $300,000 of expenses and have $300,000 of additional taxable income in 2020.  And why not?  The second example is one of a business not being in peril from COVID 19 and one where that business did truly fit the qualifications for the program.
  11. Nick | May 04, 2020
    It's not that it's a bad deal. It's typical government sidestepping.  It's supposed to be non taxable and now it is. Wait until your clients hear about this. They won't care that it's a good deal. And most of my clients will be paying over 40% back.
  12. Jordan MacWolff | May 04, 2020
    I agree with the IRS's conclusion on how PPP loans and Sec 265 interact at the moment. A policy matter for lawmakers to consider is that this liquidity injection results in additional estimated taxes being due during a period of economic uncertainty and strain, possibly sapping from businesses cash they need (unless other losses "make up" for this income). It is reasonable that lawmakers could desire this to be truly tax-free to avoid that but it is they who need to act.
  13. BPJ | May 04, 2020
    I agree with Concerned OH CPA; if the expenses paid with non-taxable PPP funds are deductible, that essentially provides an additional tax benefit by sheltering unrelated (to the PPP) taxable income.   
  14. Jim | May 03, 2020

    FAH, exactly right

     

  15. Jack | May 03, 2020
    Any idea on how this will impact income from partners or sole proprietors that has been forgiven since they don't deduct it like S-Corp or C-Corp wages?
  16. Kristen | May 03, 2020
    Most of the businesses applying for this loan have been severely impacted by COVID-19. When the CARES Act was passed, Congress was specific in that the loan funds would not be taxed. Now the IRS is reversing that and hurting these companies even more. It’s like kicking someone when they’re down, you just don’t do that. 
  17. FAH | May 03, 2020
    Ok, think aout it. Uncle Sam gives you 100K. But then says he wants 21K. Why complain, your are 79K richer. It is like hitting the lottery and complaining about paying the tax. If you think you got a bad deal give back the 100K. I’ll take that deal all day long.
  18. Concerned OH CPA | May 03, 2020
    Dont understand the Ohio CPAs logic here? If you paid expenses with free money that you have no liability to repay why should you get a tax deduction on the expenses you paid with it up to the amount of the PPP loan? It’s different if it was a regular loan that you have liability to pay back that’s a different story.
  19. John Satink | May 03, 2020

    All of our politicians were elected to serve and protect this nation and its people.

    I do not believe there is a single one of them performing. But they do get their regular paychecks and benefits.

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