Tagcovid-19

IRS Clarifies Non-Deductibility of Expenses Paid With Forgiven PPP Loan Proceeds

By: Amanda Wilson

The Paycheck Protection Program (“PPP”) included in the CARES Act allows businesses with 500 or fewer employees to receive loans to pay payroll costs, rent and certain other expenses. PPP loans can later be forgiven if the employer retains its employees and satisfies other requirements (a discussion of these requirements can be found here).

The CARES Act provides that the amount of any PPP loan that is later forgiven does not give rise to taxable income. Without this provision, the forgiveness of the loan would constitute taxable income in the form of cancellation of indebtedness income.

One question that I repeatedly get asked is whether businesses that used PPP loan proceeds to pay deductible expenses (such as payroll or rent) are able to deduct these expenses if the PPP loan is later forgiven. Unsurprisingly, the IRS has answered that question with a resounding no.

In Notice 2020-32, issued yesterday, the IRS states that because the amount of the forgiven loan is excluded from income, the forgiven loan is a class of exempt income under Section 265 of the Internal Revenue Code. As a result, Section 265(a)(1) applies, which disallows a deduction otherwise allowable under the Internal Revenue Code if allocable to one or more classes of exempt income (other than interest income).

Further, the IRS determined that any otherwise deductible expenses funded by PPP loan proceeds that are subsequently forgiven are not deductible. This position is not surprising, as otherwise businesses would have gotten a double tax benefit from the PPP loan forgiveness program.

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up to date on the latest news.

CARES Act Eases Limitation on Deducting Business Interest Expenses

By: Amanda Wilson

The 2017 Tax Cuts and Jobs Act introduced a new Section 163(j) limitation on taxpayers deducting business interest expense (our prior discussion of this tax law change can be found here). Under this limitation, businesses could generally only deduct net business interest expense in any given year equal to 30% of adjusted taxable income. This provision was intended as a revenue raiser to offset the cost of the tax cuts associated with the Tax Cuts and Jobs Act.

To assist businesses struggling in the current economic environment, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act enacted last month provides a temporary easing of this deduction limitation.

Specifically, Section 2306 of the CARES Act increases the limitation from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years, allowing businesses to take a larger interest expense deduction. In the case of partnerships, the increased limitation is only available for the 2020 tax year. This relief is not mandatory, as a taxpayer may elect to continue to apply the 30% limitation if they wish to do so.

In addition to increasing the percentage limitation, the CARES Act also allows taxpayers to elect to use their 2019 adjusted taxable income in calculating their 2020 limitation. This change recognizes that, for the majority of taxpayers, the 2019 adjusted taxable income will be higher than their 2020 adjusted taxable income, and therefore will provide more of a benefit.

Taxpayers who have already filed their 2019 tax returns may want to consult their tax advisors and consider filing an amended return to take advantage of this recent tax change.

Be sure to visit our Coronavirus (COVID-19) Resource Center to keep up to date on the latest news.

IRS Expands on Tax Extension Relief

By:  Ferran Arimon and Amanda Wilson

Last month, the Internal Revenue Service (IRS) announced that the income tax filing deadline had been pushed to July 15, 2020, for income tax returns due on April 152020. This relief was subsequently extended to certain gift tax returns.

The IRS has granted further automatic extensions in newly issued Notice 2020-23. Among the extended deadlines are the following:

  • Extension of Estimated Tax Payment Deadlines for Individuals and Corporations. The IRS’s prior extension meant that first quarter estimated tax payments that were previously due on April 15 are due July 15. Notice 2020-23 extends until July 15 any quarterly or estimated tax payment due by an individual or corporation on or after April 1. This means that second quarter estimated tax payments that were due June 15 are now due July 15. This resolved the unusual situation where second quarter payments would otherwise have been paid before first quarter payments.
  • Extension of deadline to claim 2016 refunds. The April 15 deadline for claiming a refund based on 2016 tax returns has also been extended to July 15. This is an extension of the 3-year window of opportunity to claim a refund. Taxpayers must ensure their tax return claiming the refund is postmarked by July 15.
  • Extension of Like-Kind Exchange and Opportunity Zone Deadlines. The 45-day and 180-day periods  provided for under the Section 1031 like-kind exchange rules or Section 1400Z-2 opportunity zone rules are extended until July 15, 2020, if the period otherwise expires between April 1, 2020, and July 14, 2020. This extension is discussed separately here.
  • Extension of Time to File Tax Court Petitions. If a taxpayer is under a deadline to file a Tax Court Petition that would otherwise expire between April 1, 2020, and July 14, 2020, the deadline for filing is extended to July 15, 2020.

A cautionary note: the relief outlined above applies to federal obligations and does not apply to any state obligations. Taxpayers should check whether their state or states have provided similar extensions.

While this summary provides a brief overview of some of the extensions offered by the IRS, you should contact your attorney and/or CPA for additional guidance as to your specific filing deadlines.

We will continue to monitor announcements from the IRS and provide you with any further updates as they become available.

Be sure to visit our Taxing Times blog, as well as our Coronavirus (COVID-19) Resource Center page, to keep up to date on the latest news.

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