Late last week the IRS issued a rule that no deduction is allowed under the Internal Revenue 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. A forgiven Paycheck Protection Program (PPP) loan is not being considered taxable income at this time. However, if the expenses covered by the forgiven loan were deductible, the IRS views this as a double or triple tax benefit, the funds are not taxable as income, and an expense deduction may exist. The new rule eliminates this perceived double dip.
What this means for many corporations will be that if the recipient of the PPP funds uses the funds for payroll and other expenses that are typically deductible, those expenses will not now be deductible. This may result in a significantly higher tax obligation. Further, it may necessitate an increase in the company’s estimated quarterly tax payment and a risk of penalties if the loan is forgiven and the increase quarterly estimated tax payment is not made.
Some in Congress have indicated that they will seek modification of this IRS rule by passing a law that explicitly allows the deduction.
Thus, the PPP related rules from both the IRS and the Small Business Administration require continual monitoring.
Entities should consult with their tax professional and business attorney to develop the appropriate strategies.
If you have any questions, please contact Richard Davis or Katherine Deets, at 360.671.1796.