The IRS issued Notice 2020-32, which discusses the ability to deduct expenses paid with proceeds from the Paycheck Protection Program loan.
Pursuant to Section 1102 of the CARES Act, Qualifying Businesses are eligible for a Small Business Administration Paycheck Protection Loan of up to 2.5 times their average monthly salary, calculated as defined in the Act. Section 1106 of the CARES Act provides that such loans are waived, subject to certain eligibility requirements, in the amount of the eligible expenses (payroll, interest, benefits and certain other expenses) paid by this company during “the eight-week period beginning on the date of granting a covered loan. ”
In general, debt relief is the taxable income of a taxpayer whose debt is canceled in the amount of such debt relief under Section 108 of the 1986 Internal Revenue Code (“Code”). However, CARES Act provides in Section 1106 (i) that for the purposes of the Internal Revenue Code, any amount “that would be included in the gross income of the Eligible Recipient, by virtue of [such] Forgiveness … is excluded from gross income. ”This provision should give the borrowing business a benefit by allowing the full amount of the loan to be used for chargeable costs. However, what the CARES Act provides in this regard appears to have been taken away by the IRS in IRS Notice 2020-32. Citing Section 265 (a) (1) of the Code which prohibits any deduction when “assignable to one or more income brackets … fully exempt from taxes imposed by this subtitle”, this notice concludes that those paid with paycheck protection Expense loans that are waived are not deductible. This treatment effectively puts the taxpayer in the same position as if the loan were granted entirely taxable. Since this appears to contradict the intent of Congress under the CARES Act, hopefully the IRS will reconsider this position. As we understand it, House Ways and Means Committee Chairman Richard Neal has announced his intention to make small business loan-funded expenses explicitly tax deductible in the next COVID-19 Response Act, an opinion we believe the Finance Committee of the Senate Chairman Chuck Grassley is divided.
“The intent was to maximize the ability of small businesses to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible,” Grassley said in a statement. “This notice contradicts this intention.”
© 2021 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume X, Number 125