May 7, 2020
Dear Clients & Friends:
Re: Care Act Update; PPP Loan Forgiveness
You are receiving this letter because our records indicate you have applied and/or been approved for the Paycheck Protection Program loan.
On May 1, 2020, the IRS issued Notice 2020-32 which talks about the Paycheck Protection Program loans that are a part of the CARES Act. The IRS has effectively reminded us that if something sounds to good to be true it probably is.
Many small businesses have applied for and received PPP Loans. The guidance in the CARES Act says that if you use the money to pay wages to employees, pay health insurance, rent, utilities, etc. that the loan may be forgiven by the SBA. We have been advising clients to track how the PPP loan money is used so that at the end of eight weeks they are ready to complete the application for loan forgiveness. The CARES Act goes on to say that any part of the loan that is forgiven will be excluded from taxable income.
The IRS confirms this treatment in Notice 2020-32, but also goes on to say that the expenses paid with the money from the PPP loan that is forgiven will not be tax deductible. The IRS points out that in accordance with IRC Section 265, that any expenses directly associated with tax exempt income must be tracked to that income, and not used to offset other taxable income. The purpose of this code section is to prevent a double tax benefit.
I am fond of saying that the devil is always in the details. Thanks to this IRS notice, the devil appears earlier than usual. What will this mean to Businesses when they file their 2020 tax returns? It means that we will be paying taxes on the portion of PPP loan that is forgiven. For C-Corporations it means they will pay federal taxes of $21 for every $100 of loan forgiveness. For S-Corporations and Partnerships the owners will pay at whatever tax bracket they are in personally. For those in the 24% federal bracket, it will be $24 for every $100 of loan forgiveness. It will also be taxable for the state. State taxes will vary depending on the tax bracket the taxpayer is in.
Loan Forgiveness is still a good deal, just not as good as the CARES Act made it sound. The taxes discussed above related to the PPP loan forgiveness are not automatic. Year-end tax planning will be more important than ever in 2020 to successfully reduce or eliminate these taxes. Contact us if you have any questions about this information.
Starkey & Company, PA