The Paycheck Protection Program (PPP) offers forgivable loans to businesses to cover payroll costs, mortgage interest, rent, and utilities. One of the benefits of the program is that any loan forgiveness is not includable in taxable income. Yesterday, the IRS released Notice 2020-32 to clarify that expenses paid with forgiven PPP funds are not deductible. The Notice refers to Internal Revenue Code Section 265(a)(1), which states that no deduction is allowed for expenses allocable to tax-exempt income. Since PPP loan forgiveness is exempt from tax, any expenses paid with the forgiven loan proceeds are not deductible. The purpose of this treatment is to prevent a double tax benefit.
From an accounting perspective, the forgiven loan proceeds should be applied against whichever qualifying expenses were approved for forgiveness. One way to show this in your company’s books is to create a contra account, which would reduce the expense account by the amount forgiven. Contact your ATKG adviser for assistance in making this decision.
ATKG hosted a webinar yesterday that covered the Paycheck Protection Program along with the new tax provisions from the CARES Act. A recording of the webinar can be found here.
There is still much ambiguity surrounding PPP loan forgiveness, and we expect the SBA to issue additional guidance. For now, we suggest you read this PPP loan forgiveness guide that the AICPA released, which provides an easy-to-read overview of the rules.
As always, we are committed to keeping you informed. Visit ATKG’s Coronavirus Newsroom for the latest news.
Allison Miller is a Senior Manager with ATKG. She serves as Director of the firm’s federal tax practice. Allison holds both a bachelor and master degree in accounting from Texas A&M University, having graduated Summa Cum Laude. Arriving at ATKG in August 2017, she comes to us with 10 years of public accounting experience from the Big Four and a great background in retail, non-profit, and wealth management.
For further information on this topic or other tax questions please contact Allison Miller or a member of our Tax practice at 210.733.6611 or firstname.lastname@example.org.