The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. Specifically, an expense isn’t deductible if both:

  • The payment of the expense results in forgiveness of a loan made under the PPP, and
  • The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

PPP basics

The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations.

A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments.

The law provides that any forgiven loan amount “shall be excluded from gross income.”

Deductible expenses

So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?

The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.

No double tax benefit

In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”

More possibly to come

Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment. Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible. Stay tuned.

© 2020 Covenant CPA

The Coronavirus Aid, Relief, and Economic Security (CARES) Act eliminates some of the tax-revenue-generating provisions included in a previous tax law. Here’s a look at how the rules for claiming certain tax losses have been modified to provide businesses with relief from the novel coronavirus (COVID-19) crisis.

NOL deductions

Basically, you may be able to benefit by carrying a net operating loss (NOL) into a different year — a year in which you have taxable income — and taking a deduction for it against that year’s income. The CARES Act includes favorable changes to the rules for deducting NOLs. First, it permanently eases the taxable income limitation on deductions.

Under an unfavorable provision included in the Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 and later and carried over to a later tax year couldn’t offset more than 80% of the taxable income for the carryover year (the later tax year), calculated before the NOL deduction. As explained below, under the TCJA, most NOLs arising in tax years ending after 2017 also couldn’t be carried back to earlier years and used to offset taxable income in those earlier years. These unfavorable changes to the NOL deduction rules were permanent — until now.

For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried over into those years. So NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income for those years.
For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of:

  • 100% of NOL carryovers from pre-2018 tax years, plus
  • The lesser of 100% of NOL carryovers from post-2017 tax years, or 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years.

As you can see, this is a complex rule. But it’s more favorable than what the TCJA allowed and the change is permanent.  

Carrybacks allowed for certain losses

Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally couldn’t be carried back to earlier years and used to offset taxable income in those years. Instead, NOLs arising in tax years ending after 2017 could only be carried forward to later years. But they could be carried forward for an unlimited number of years. (There were exceptions to the general no-carryback rule for losses by farmers and property/casualty insurance companies).

Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years.

Important: If it’s beneficial, you can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years. In addition, barring a further tax-law change, the no-carryback rule will come back for NOLs that arise in tax years beginning after 2020.

Past year opportunities

These favorable CARES Act changes may affect prior tax years for which you’ve already filed tax returns. To benefit from the changes, you may need to file an amended tax return. Contact us to learn more.

© 2020 Covenant CPA

To stem the tide of joblessness caused by the coronavirus (COVID-19) outbreak, the Small Business Administration (SBA) has officially launched the Paycheck Protection Program (PPP). The program’s stated objective is “to provide a direct incentive for small businesses to keep their workers on the payroll.”

What does the program offer?

The PPP was authorized under a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It provides up to eight weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the COVID-19 crisis and cover certain other expenses.

Under the program, eligible recipients may qualify for loans of up to $10 million determined by eight weeks of previously established average payroll. The first loan payment is deferred for six months. All loans will have an interest rate of 1%, a maturity of two years, and no borrower or lender fees.

If the recipient maintains its workforce, up to 100% of the loan is forgivable if the loan proceeds are used to cover the first eight weeks of payroll, rent, mortgage interest or utilities. (The U.S. Treasury Department anticipates that no more than 25% of the forgiven amount can be for non-payroll costs.)

How is payroll defined?

Under the PPP, payroll includes:

  • Employee salaries (up to an annual salary of $100,000),
  • Hourly wages,
  • Cash tips,
  • Paid sick or medical leave,
  • Group health insurance premiums,
  • Retirement benefit payments,
  • State or local tax on employee wages, and
  • Compensation to a sole proprietor or independent contractor of up to $100,000 per year.

If the PPP recipient doesn’t retain its entire workforce, the level of forgiveness is reduced by the percentage of decrease. However, if the laid-off workers are rehired by June 30, the full amount of the loan may still be forgiven.

Who’s eligible?

Eligible recipients are small businesses with fewer than 500 employees (including sole proprietorships, independent contractors and self-employed persons). Private nonprofits and 501(c)(19) veterans organizations affected by COVID-19 may also qualify. In addition, businesses in certain industries with more than 500 employees may be eligible if they meet the SBA’s size standards for those industries.

The PPP begins retroactively on Feb. 15, 2020, and ends June 20, 2020. (The retroactive start allows eligible recipients to bring back workers who were laid off because of the crisis.) Qualifying companies may apply for a loan at lending institutions approved to participate in the program through the SBA’s 7(a) lending program. Applications may also be available through participating federally insured depository institutions, federally insured credit unions and Farm Credit System institutions.

When should you apply?

The Treasury Department released the PPP Application Form on March 31, and lenders could begin processing applications on April 3. If you believe your small business may be eligible to participate, it’s a good idea to apply as soon as possible because funds are limited under the program. We can help you confirm your eligibility, complete the application and optimally manage any loan funds you receive.

© 2020 Covenant CPA