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COVID-19, Tax & Assurance Guidance

The IRS is the New Player with New Numbers in the PPP Loan Program

Posted on May 1, 2020 by

Tim Hilligoss

Tim Hilligoss

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No deduction for expenses incurred that result in Paycheck Protection Program (PPP) loan forgiveness

It’s all in the numbers. How many times have we heard this in our lives? Or, how about the numbers don’t lie? Well, maybe they don’t lie, but the numbers can – and do – change the playing field. The PPP loan program is certainly no exception. These changes are making it tough for the “small business” to count.

As a CPA, numbers are always in my head for many reasons. As a business owner, numbers for your business should be the most important numbers on your mind. However, now you are getting bombarded with numbers from our federal, state, and local governments on the impact of COVID-19. Medical experts use the numbers to advise our leaders on the plan to survive COVID-19. And, the Treasury and SBA use numbers to change the PPP program. This is happening daily.

So, what are some of the numbers that have impacted the PPP – a law that within five days of its enactment was relied upon for billions of dollars of decisions? On the PPP loan application, here are just a few examples of the challenges business owners are facing:

  • Question 7 eliminated the ability for any business with foreign owners to apply, even if their entire workforce was in the US
  • Question 16 let us know that you do not subtract payroll withholding from the calculation of “Payroll Costs”
  • Question 20 let us know when the eight-week period for forgiveness begins
  • Question 31 raised the question of eligibility for large companies with “adequate” sources of liquidity
  • Question 37 raises the same eligibility question for private companies with adequate sources of liquidity
  • Question 39 lets us know that all loans in excess of $2 million will get reviewed

Who knows when this will stop? I am not here to judge whether these numbers are right or wrong. Just like your eligibility, that judgement seems pretty subjective. Isn’t clarification a good thing? It’s tough to be able to count on anything at this point. Hindsight might make you a hero to some, and heel in others.

IRS Game Changer

If you haven’t yet heard, another player has entered the numbers game – the Internal Revenue Service (IRS). Their numbers are not so good due to Notice 2020-32. Ouch! This notice is full of numbers –1106,161,162 and 163 — among others. The most important number, however, is 265. Section 265 prohibits what they call a double benefit. It states that in the case of the PPP loan, loan forgiveness is not taxable, and your expenses incurred are tax-deductible; which creates a double benefit. Without getting too deep, the IRS is applying their interpretation of Section 265, which would not allow a deduction for the expenses you incur which ultimately result in the tax-exempt income of the debt forgiveness under the PPP loan program. I guess they think your business getting the PPP loan produces tax-exempt income if the loan is forgiven. Tough to digest this isn’t it?

We’ll unpack this notice and more during next week’s PPP check-in video. It will undoubtedly be a robust conversation!

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.

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Tim Hilligoss

Shareholder, Tax & Assurance

As a trusted advisor, Tim guides clients through business transactions, tax issues and international expansion.

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