Last night, IRS issued Notice 2020-32. Under the CARES Act, PPP loan amounts that are forgiven, are specifically excluded from taxable income. The IRS has ruled that any expense that results in the forgiveness of PPP proceeds, is non-deductible. This is to prevent a “double benefit” from occurring.
For example, taxpayer receives a $100,000 PPP loan. Taxpayer spends $80,000 of the proceeds on covered payroll costs, and $20,000 on covered rent costs. The entire $100,000 PPP loan is forgiven. The taxpayer will not recognize any income on the $100,000 amount forgiven. The taxpayer will not have a tax deduction for the $80,000 of covered payroll costs, and $20,000 on covered rent costs.
The overall impact is you can’t use the PPP money to create an overall net tax deduction. In the example above, if those were the only amounts the company incurred during the taxable year, the amount of taxable income would be zero. If a company earned $100,000 of revenue and had the same expenses, the amount of taxable income would be zero.
Another example would involve a company that had no loss in revenue, but got $100,000 of PPP money, and spent $80,000 on covered payroll costs, and $20,000 of rent. The company would lose $100,000 in tax deductions, and would have to pay a higher tax, since they have fewer deductions. However, they also received $100,000 more than “normal”, so it would make sense that they would have to pay more in tax, because their net cash flow is ultimately $100,000 higher (due to the loan proceeds that now don’t have to be repaid).