Late yesterday, the IRS released Notice 2020-32, clarifying how the IRS will treat expenses paid with funds from the Paycheck Protection Program (PPP).
The PPP provides 8 weeks of cash-flow assistance through 100 percent federally guaranteed loans to small employers who maintain their payroll during the COVID-19 crisis. If the employer maintains payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities is forgiven. Any portion that is forgiven is non-taxable. However, with the issuance of Notice 2020-32, the IRS will not allow a deduction for the expenses paid for with forgiven PPP proceeds.
Although the forgiven funds are nontaxable, expenses paid with the loan will not be deductible.
Example: A company with $100k/month in payroll expenses receives a PPP loan of $250k. If they utilize the PPP funds to cover $200k of payroll, $40k in rent and $10k in utilities in the first 8 weeks, that amount will be forgiven. However, that company will not be able to deduct that $250k in forgiven costs on their 2020 income tax return.
Financial Statement Implications
Should the loan be forgiven, you will have forgiveness of debt income, which will increase net income for your GAAP based financial statement. Keep this in mind if you have financial covenants, typically unusual income such as forgiveness of debt income would not be included in a covenant calculation. However, the expenses that are not deductible for tax purposes, will still remain as expenses for financial statement purposes.
Please reach out to us for a clear explanation regarding your individual situation.