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After being silent for a few days, on April 30, 2020, the IRS released new guidance regarding the Paycheck Protection Program. The guidance announces that, upon forgiveness of your loan, the expenses paid from your PPP loan that gave rise to the forgiveness will not be deductible as a business expense.
When the program was announced and the language of the CARES Act was released, the proceeds were specifically identified as non-taxable. The purpose of these loans was to keep people employed, hence the term "Paycheck Protection Program."
The guidance that has been released since the enactment of the CARES Act by the U.S. Treasury, U.S. Small Business Administration, and representatives of the U.S. government has both interpreted the CARES Act as well as contradicted the specific language of the Act. Two clear divergences from the language of the Act include the requirement to use at least 75% of PPP loan proceeds for payroll costs and the notification that many who initially qualified for the loans could be prosecuted for illegally obtaining and retaining the funds.
In the April 30 IRS announcement, it appears that while the PPP loan forgiveness will not be considered taxable income, the expenses associated with the forgiveness will not be a deductible expense. This is merely semantics that appear to be contrary to the language of the law.
The IRS has taken the position that if you have received PPP funds, used them to pay qualifying expenses, and the loan is forgiven then it is a net sum zero impact to you because you neither recognize the income nor the expenses. Said differently, the funds allowed businesses to keep workers employed without costing the employer the cash.
Can Congress act to override this decision by the IRS? It certainly can. We are currently staying abreast of this issue and all developments related to COVID-19 and the actions of our lawmakers. If you have any PPP loan questions, don’t hesitate to reach out to your Delap advisor.