The IRS has issued guidelines (Notice 2020-32) to explain that a taxpayer who receives a loan under the Paycheque Protection Program (PPP) is not allowed to deduct expenses that are normally deductible under the Code, to the extent that the expenses have were repaid by a PPP loan which was later canceled. The PPP was created by article 1106 of the law on aid, relief and economic security against coronaviruses (CARES law), PL 116-136. Under Section 1106 (b) of the CARES Act, an eligible recipient of a covered loan may receive debt relief on the loan in an amount equal to the sum of payments made for the following expenses during the course of the loan. the eight week covered period starting from the original date of the covered loan: (1) staff costs; (2) any payment of interest on any covered mortgage bond; (3) any payment on any covered rent obligation; and (4) any covered public service payment. Section 1106 (i) excludes from gross income any amount remitted under the PPP.
The notice explains that while expenses paid by the PPP may be deductible under Sec. 162 as a commercial or business expense or under Sec. 163 by way of interest, s. 265 prohibits a taxpayer from making a deduction for any amount otherwise eligible as a deduction for the taxpayer that is attributable to one or more categories of income other than interest (whether an amount of income in that category or categories is received or accumulated) which is totally exempt from the taxes imposed by sub-title A of the Code. The purpose of sec. 265 is to avoid a double benefit by preventing a deduction for excluded income.
According to the IRS, Sec. 265 (a) (1) prohibits an otherwise permissible deduction under any provision of the Code, including Secs. 162 and 163, for the amount of any payment of an eligible expenditure under section 1106 to the extent of the resulting covered loan forgiveness (up to the total amount forgiven) because such payment is attributable to a tax exempt income. This is consistent with the purpose of Sec. 265 to avoid double taxation. The IRS quoted Reverend Rul. 83-3 for the proposition that deductions should be reduced to the extent that the associated expense is attributable to amounts excluded from gross income.
The CARES Act itself does not specify whether deductions otherwise permitted under the Code for payments of eligible expenses under Section 1106 by a recipient of a covered loan are permitted if the covered loan is subsequently canceled following payment of these expenses.
The AICPA strongly believes that the IRS’s interpretation of denying deductions for waived expenses under the P3 program is contrary to the intent of Congress. Chris Hesse, CPA, chairman of the AICPA tax executive committee, said, “Indeed, the IRS guidelines mean that the tax provision [Section 1106(i)] has no sense. Why waste ink on saying that for Code purposes loan forgiveness is not included in income if the government just takes deductions of the same amount? “
Because she believes the intent of the CARES Act was to allow businesses to deduct all their ordinary and necessary expenses – including any expenses used to determine the costs covered by PPP – the AICPA plans to seek legislative clarification. . “We hope to see movement on the legislative front early next week,” said Edward Karl, CPA, AICPA Vice President – Tax Policy and Advocacy.
AICPA Paycheque Protection Program Resources The page houses resources and tools produced by the AICPA to help cope with the economic impact of the coronavirus.
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For tax resources, visit the AICPA website Coronavirus (COVID-19) Tax Resources Page.
– Sally P. Schreiber, JD, ([email protected]) is a JofA editor-in-chief.