On April 30th, the IRS issued Notice 2020-32 addressing the taxation of Paycheck Protection Program (PPP) funds. The PPP provides funding that allows for forgiveness if used for qualified Payroll, Rent, Utilities, and certain other expenses over an eight-week period. The funds are not taxable, but the original law did not address the deductibility of the costs used or being claimed for forgiveness. The recent IRS Notice addresses this issue.
Under Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that results in forgiveness under section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). To reiterate, while the proceeds of the CARES Act are not taxable, the organization utilizing them will not be able to deduct the portion directly attributable to its forgiveness for tax purposes.
As organizations continue to weigh the benefits of this or other available programs, it adds another layer of complexity to the analysis. This is certain to garner action in Washington and the best course of action at this time may be to wait on further guidance before making any decisions. The SBA and Treasury departments have yet to release specifics concerning the details involving how loan forgiveness will occur and Congress can elect to pass legislation allowing for more favorable tax treatment of the PPP.
We will provide more information as it becomes available.