TagPPP loans

New COVID-19 Relief Bill Allows Deductibility of Expenses Paid with Forgiven PPP Loans

By: Amanda Wilson

As I previously reported in an article published earlier this month, the IRS has repeatedly taken the position that businesses cannot deduct otherwise deductible expenses (such as payroll or rent) if the business used Paycheck Protection Program (“PPP”) loan proceeds to pay those expenses if the PPP loan is later forgiven. I’m happy to share that Congress is rejecting the IRS’s position.

The new COVID-19 relief package announced by Congress yesterday will include a provision that allows businesses to take tax deductions for expenses paid with forgiven PPP loans. The specifics of this provision are not yet known, but it is expected that this will provide a significant tax benefit to businesses that incurred PPP loans.

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

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.

Executive Order Provides PPP Loans Not Subject to Florida Doc Stamps Tax

By: Amanda Wilson and Matt O’Kane

The Paycheck Protection Program included in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows businesses with 500 or fewer employees to receive federally-guaranteed loans to pay payroll costs, rent, and certain other expenses in an effort to keep these employees on their employer’s payroll. The program provides for subsequent loan forgiveness if the employer retains its employees and satisfies other requirements (a discussion of these requirements can be found here).

As Florida businesses rush to apply for Paycheck Protection Program loans, an unexpected cost of these loans was surfacing. The State of Florida imposes a documentary stamp tax on promissory notes and other written promises to pay a sum certain signed or delivered in the State of Florida. As a result, the tax would, absent governmental action, apply to Paycheck Protection Program loans.

On Monday, Governor DeSantis issued Executive Order Number 20-95, which provides that the Florida documentary stamp tax would not apply to any of these loans. Absent this action, Florida small businesses receiving these loans would have been subject to tax at the rate of 35 cents per $100 of principal (or portion thereof), subject to a maximum tax of $2,450. This executive order provides some additional relief for small businesses struggling in the face of the coronavirus pandemic.

It should be noted that the executive order was explicitly limited to Title I of the CARES Act, which governs the Paycheck Protection Program. The executive order does not extend to Title IV of the CARES Act, which provides for a $500 billion loan program for large businesses and municipalities.

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

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