IRS States Loan Forgiveness Expenses Not Deductible

Editor’s Note: Thank you for viewing this resource about the Paycheck Protection Program (PPP). This was a cornerstone for many organizations during the COVID-19 pandemic, but it’s important to stay current on the latest financial support options. Like PPP, the Employee Retention Credit (ERC) can be leveraged to bring your business significant financial relief.

We invite you to dive into our ERC content here. Need professional advice on maximizing your ERC benefits? Learn more about our Employee Retention Credit consulting services and then contact us.

Yesterday the IRS issued new guidelines around Notice 2020-32 which clarify that those expenses incurred which relate to the loan forgiveness under the Paycheck Protection Plan (PPP) are not deductible expenses.  This matter was not specifically addressed when the CARES Act was released.  As a result, the IRS issued the statement to make it clear that since the loan forgiveness is not taxable income the related expenses should not be deductible. This new notice reinforces Section 265 of the IRS code which prevents double tax benefits.

WHAT SHOULD I DO NOW?

Once a loan is received from the PPP program, businesses need to be strategic about how to bring employees back, how to spend the funds, and how to ensure you receive the maximum amount of loan forgiveness. Here are a few planning points we suggest:

• Make sure proceeds are used on covered expenses only to maximize forgiveness
• Use at least 75% on payroll expenses
• Keep thorough documentation of how the proceeds are used so you can apply for forgiveness

Tracking expenses is an important part of maximizing PPP loan forgiveness. Once you identify which expenses are eligible for PPP forgiveness, it’s time to start keeping track of these expenses and calculate your potential forgiveness amount. The AICPA has released several tools to help you do this. They can be found on the KatzAbosch’s COVID-19 Resource Center, Under Calculators.

As a reminder, there are a few other stipulations businesses must follow for their full loan to be forgiven:

• Businesses must maintain the headcount and salaries of employees as the same pre-COVID-19 level.
• The expenses need to be paid for during the covered period, defined as the 8-week period immediately after you receive the loan proceeds.

If these requirements are not met, the loan must be repaid within two years.

As always, we are here for you, your family, and your business. Contact your KatzAbosch representative to discuss your specific situation and how to move forward during this challenging time.