Notice 2020-32 on the Tax Effect of the Paycheck Protection Program
On Thursday April 30th, the IRS issued Notice 2020-32 (https://www.irs.gov/pub/irs-drop/n-20-32.pdf) to provide clarity as to how to handle the tax effect of Paycheck Protection Program (PPP) funds. As most people are now aware the PPP provides funding based on 2.5 months of the prior year’s payroll. The amount of the funds used for Payroll, Rent, Utilities, and certain other expenses over an eight week period are forgiven. The funds are not taxable, but the law did not address the deductibility of payroll costs paid with these funds, the IRS answers the question in this Notice.
Under Notice 2020-32 the IRS clarifies that no deduction is allowed for an expense that results in forgiveness under section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In other words while the proceeds of the CARES Act are not taxable, the company utilizing them will lose out on deductible expenses. Take a company with $100k/month in covered payroll that receives a PPP loan of $250,k. If they utilize the PPP to cover $200k of payroll, and $20k in rent in the first 8-weeks, that amount will be forgiven. However, that company will not be able to deduct that $220k in forgiven costs on their 2020 tax return.
As taxpayers are looking at the effect of their PPP loan, this is an important issue to acknowledge. Considering that CARES Act limited the ability to take both a PPP Loan and certain employee retention credits, for some taxpayers that missed out on the PPP the difference might not be as great as first considered. Each taxpayer should talk to their CPA to discuss how this provision effects their tax liability.