PPP: When Free Money Isn’t So Free

The Paycheck Protection Program (PPP) loans seem too good to be true. You get money for paying employees and necessary expenses, and they might not have to be repaid! It’s free money.

Well, not so fast.

Yesterday, the IRS released Notice 2020-32. The notice, which runs seven pages, can be boiled down to one very long sentence:

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.

In English, if your PPP loan is forgiven, you cannot take a deduction for any expenses related to the income that isn’t taxable. Now, how forgiveness is determined isn’t certain at this point, but the IRS’s view is that expenses that result in tax-exempt income aren’t deductible.

So let’s say you have a loan that is forgiven of $10,000. Is it better to pay back the loan (the interest rate is 1%), and not lose the tax credits for employee retention, or lose the business expenses and tax credit? Since we don’t yet know the full details on forgiveness it’s not possible to say much more here, but I strongly suspect the answer will be, “It depends.”

Senator Chuck Grassley (R-Iowa), chair of the Finance Committee, wasn’t happy with the IRS decision. He’s quoted in the Wall Street Journal: “The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible. This notice is contrary to that intent.” So it’s possible Congress will override the IRS’s view on this. We will just have to wait and see.


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