Late last week, the IRS released Notice 2020-32, which substantially changes the tax treatment of the Payroll Protection Program (PPP) loan program. The CARES Act explicitly states that the forgiveness of the loan is not taxable income. The IRS has concluded that while the forgiveness is not taxable income, the qualifying expenses (payroll, employee benefits, rent, etc.) will be non-deductible. The IRS Notice therefore does effectively make the forgiveness taxable income.
IRS Notice 2020-32 is substantially different than all of the initial information released about the PPP program, and from what we have read, it is also contrary to the intent of the CARES Act legislation. At this time, it is unclear whether the IRS position will remain as stated in the Notice or if the Notice will be reversed. It is also possible that a legislative fix is introduced. However, it’s quite possible this may not occur until after your 8-week loan forgiveness period is over.
Our general recommendation is to open a separate bank account dedicated to holding the PPP loan proceeds, and then as you have qualifying expenses, transfer funds from the dedicated account to the general operating account to cover the qualifying expenses, while retaining in your records the documentation showing substantiation for the transfer of those funds.
At this time, there is still no guidance issued by the SBA on how to calculate the forgiveness of the PPP loans – either for explicitly what expenses do qualify and/or how the FTE employee counts will be determined. This makes good decision-making very difficult, especially for those who received the PPP funds at the very beginning of the program. The best source of official information is the SBA website which has an FAQ they are updating every couple of days as well.
The American Institute of CPAs is aggressively pushing for more flexibility in terms of the dates the funds must be used as well as what qualifies for forgiveness, but to date, their recommendations have not been addressed.
We are happy to discuss this further with you, however answers to many questions are still unknown at this point.