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.