Does Notice 2020-32 Meet Congressional Intent?
On Thursday April 30th, the IRS issued Notice 2020-32. The notice was prepared to answer how to handle the deductibility of expenses paid for with Paycheck Protection Program (PPP) proceeds. Under Notice 2020-32 , the IRS confirms expenses used for forgiveness of a PPP loan could not also be taken as a deduction. Many are asking, Was this the intention of the law?
It is important to first understand the background. Under the Paycheck Protection Program the amounts spent over an eight week period for payroll, interest on covered mortgages, rent, and utility payments can be forgiven from the PPP loan amount. Section 1106 goes on to say that amounts forgiven “shall be excluded from gross income”. However, the law does not address whether companies also get to deduct these amounts under Code Section 162. Under Section 162 a deduction is allowed for “ordinary and necessary expenses” incurred in operating a business including salaries and rent payments. The Tax Code also has a section to ensure that there are no double tax benefits, Section 265. This section states that no deduction is allowed for an amount that is “allocable to one or more classes of income”.
Notice 2020-32 states that “to the extent that section 1106(i) of the CARES Act operates to exclude from gross income the amount of a covered loan” that this will result in “a ‘class of exempt income’ under §1.265-1(b)(1) of the regulations”. This results in a taxpayer not being allowed to have both the forgiveness excluded from income, and a deduction for the covered payroll. However, this seems to go against the design of the program in the law.
A number of notable lawmakers have stated that this was not the intent of the legislation. Senate Finance Committee Chair Chuck Grassley (R-Iowa) stated “the intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible. This notice is contrary to that intent.” This goes across the aisle with House Ways and Means Committee Chairman Richard Neal (D-Mass) announcing through a spokeswoman that he wants to fix this issue in the next relief package. This seems to be the intent of the law, otherwise section 1106 would not have included the ability to exclude from income the amount of the loan.
Treasury is doubling down on their position. With the bad press the PPP has received Secretary Mnuchin is backing up the IRS guidance stating on Fox Business “the guidance is correct.” Considering the vast differences in the information coming from the legislative branches and Treasury, we should expect this to be addressed in more detail in the near future.