Updated 5/15/2020
On Tuesday, May 12, 2020, leadership of the United States House of Representatives proposed a bill, the “Health and Economic Recovery Omnibus Emergency Solutions Act” or the “HEROES Act”. Section 20235 of the bill states that the availability of deductions and the determination of basis in property shall be made without regard to the exclusion from gross income of the forgiven portions of loans made under the Paycheck Protection Program (the “PPP”) of the CARES Act. This provision of the HEROES Act directly contradicts the guidance promulgated by the Internal Revenue Service in Notice 2020-32 and, if made into law, would nullify Notice 2020-32. Thus, if this provision is enacted into law, businesses will be able to take deductions for expenses paid with the proceeds of loans made under the PPP to the extent otherwise permitted by the Internal Revenue Code, regardless of the forgiveness of any portion of such loans.
The House of Representatives is expected to vote on the HEROES Act today, May 15, 2020. McLane Middleton will continue monitor and provide updates on this issue.
5/5/2020
On April 30, 2020, the Internal Revenue Service published Notice 2020-32, which clarified that a business may not take tax deductions for payroll expenses paid with funds from a loan repayment of which is forgiven under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Put simply, because an employer is not required to recognize income from a loan under that Act, it is also not entitled to deduct payroll expenses paid with the loan funds.
A loan obtained under the PPP will be forgiven to the extent that its proceeds are used to cover the business’ payroll costs, mortgage interest, rent, and utilities during the eight-week period following the loan’s origination. In order to obtain complete forgiveness of the loan, a business must spend no less than 75% of the loan proceeds on payroll costs, and must restore reductions in both the number of its full-time equivalent employees and the salaries and wages of those employees by June 30, 2020.
With the publication of Notice 2020-32, the IRS has clarified that borrowers may not take deductions for business expenses to the extent that such expenses were paid for with the proceeds of the forgiven portion of a loan made under the PPP. For example, if an employer obtains a loan under the PPP and the loan is entirely forgiven, then the employer is prohibited from taking deductions for any expense paid with the proceeds of the loan. If, in a similar example, only 25% of the employer’s PPP loan is forgiven, then the employer may take deductions for expenses paid using the portion of the PPP loan that was not forgiven and that would ordinarily be deducible under the Internal Revenue Code, including under Sections 162 and 163.
As a general rule, Section 108 of the Internal Revenue Code provides that a borrower will recognize income to the extent that any portion of the borrower’s debt is discharged. By contrast to that general rule, the CARES Act expressly states that any amount forgiven under the PPP will be excluded from the gross income of the borrower. In the Notice, the IRS explains that its position prevents a borrower from obtaining the double tax benefit that would result if a borrower were permitted to take deductions for expenses paid with tax-exempt income.
IRS Notice 2020-32 is available at: https://www.irs.gov/pub/irs-drop/n-20-32.pdf