A Note on PPP Loan Forgiveness and Taxes
Last week, a good friend asked me a question about the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and the Paycheck Protection Program ("PPP"). Specifically, they wanted to know whether forgiven PPP loan amounts are treated as taxable income? Because the tax issues related to PPP loans are nuanced, I decided to expand upon it for our readers.
Question:
Are forgiven PPP loan amounts (i.e., that do not need to be repaid) treated as taxable income?
(In addition, I also provide a brief overview of the current status of the tax implications related to the deductibility of business expenses paid with forgiven PPP loans.)
Answer:
**Disclaimer: The answer below is for generalized informational purposes only and should not be construed or relied upon as tax advice. If you need tax advice, contact a tax professional.**
The tax consequences regarding forgiven PPP loans are nuanced, so businesses––small and large––who need specific advice should talk to their tax professional. This includes, for example, those who are deciding whether or not to apply for a PPP loan and those who are considering whether they should return their PPP loan prior to the May 18, 2020 safe harbor deadline.
There are at least three things to consider when it comes to the tax consequences of PPP loans: 1) the CARES Act, 2) current IRS guidance and tax law (including the Notice below), and 3) future guidance or legislation from Congress, IRS, SBA, or others.
First, the CARES Act covers the taxability of PPP loan amounts that have been forgiven. Specifically, Section 1106(i) of the CARES Act provides, in full:
"TAXABILITY.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income."
So, to the extent that a PPP loan is forgiven, the CARES Act appears to exclude that amount from the borrower's gross income. That's good news for small businesses. Yet, because of a recent IRS rule (below), the tax consequences relating to forgiven PPP loans can still present problems for borrowers.
Second, on April 30, the IRS Released Notice 2020-32, which provides that:
"Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act."
While the reasoning behind not allowing businesses to deduct expenses that were paid with forgivable PPP loans is nuanced, the rule is to prevent a "double tax benefit." That is, the scenario where a borrower obtains PPP loan forgiveness (not taxable income) and also deducts business expenses paid with the forgiven PPP loan amount. This isn't good news for small businesses (for example, see the CRS Report below).
Interestingly, this seemingly cuts against the spirit of providing relief to small businesses, which is what the CARES Act was designed to do (though, the CARES Act was silent as to the deductibility of business expenses paid with forgiven PPP loans). Indeed, some in Congress have recognized that point, so it's possible that we will see a new law that reverses the IRS Notice (see resources below).
Finally, borrowers of all sizes should be advised that the Federal government––including, Congress, IRS, SBA, and others––could publish more guidance or enact legislation regarding PPP loans and associated tax issues. In that respect, it's possible that the tax implications surrounding PPP loans could become even more complicated.
Again, for those in need of tax advice, please contact a tax professional. The information provided above is general in nature and should not serve as a substitute for particular tax advice or counsel regarding a particular, fact-specific matter.
Resources:
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