PPP Loan Update – Potential Treatment of Forgiveness Not Taxpayer Friendly

The CARES Act provided the ability to have your Paycheck Protection Program loan or a portion forgiven while having that forgiven component excluded from income. However, the Act was silent as to the treatment of allocable expenditures. Generally, businesses are allowed a deduction for ordinary and necessary business expenses. There are limits to deductibility where expenditures are allocable to income exempt from tax. On April 30th the IRS released Notice 2020-32, providing guidance that expenses paid from PPP proceeds allocable to a forgiven portion of the loan will not be deductible.

It is important to remember that the Treasury and its divisions (IRS) issue numerous types of pronouncements. Some with more authority than others. Procedural rules were established in the Administrative Procedures Act which provide for when a rule has the force of law. In order to obtain force of law in part under the APA, the agency publishes the contemplated rules, request feedback and then are required to take into consideration that feedback before finalizing the pronouncement. Notices are intended to provide guidance on an expedited basis where the IRS feels the need for immediate guidance on how they will treat certain transactions outweigh the additional time needed for a more administrative review.

While the conclusion within the notice was a disappointment to business owners and legislators alike, it brought attention in a timely manner to an otherwise drafting oversight. The immediate reactions reported in Tax Notes from Chairman Grassley (R) of the Senate Finance Committee and his counterpart Chairman Neal (D) in the House, Ways and Means Committee was this treatment was not within the spirit of the law.

“The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible,” Grassley said in a statement. “This notice is contrary to that intent.”

“We are planning to fix this in the next response legislation,” said Neal’s spokesperson Erin Hatch.

We are monitoring the situation closely, and look forward to providing updates. To discuss any questions you may have, please contact a member of your engagement team or reach out to us via our website.