IRS Rules on Deductions & Expenses Regarding Your PPP Loan

Have you considered taking a deduction on your expenses paid with PPP funds?

While it might be tempting, the IRS considers this double-dipping. Standard business deductions are not allowed by the IRS if payment of those expenses also results in PPP loan forgiveness.

Under the CARES Act, PPP loans for small businesses can be totally forgiven provided the funds are primarily used to retain employees, among meeting other requirements. However, CARES Act guidelines also state loan forgiveness is not tax-deductible. The forgiveness of your loan will result in a “class of exempt income” under 1.265(b)(1) of the Regulations.

According to Treasury Secretary Steven Mnuchin, “The money coming in the PPP is not taxable. So, if the money that is coming is not taxable, you cannot double-dip. You cannot say that you’re going to get deductions for workers that you did not pay for.”

Mnuchin stated that he had personally reviewed the IRS guidance and if the loan forgiveness had been deemed taxable, business deductions would be allowed. “This is basically tax 101,” said Mnuchin.

Many lawmakers have expressed a desire to re-address these guidelines in future legislation since the intent of the PPP loan program was to help small businesses maximize their ability to maintain fluidity, retain employees, and recover from this crisis as best possible. It is quite likely that IRS guidelines on tax exemption may be specifically addressed in any new coronavirus-related legislation to clarify the original intent of the PPP loan program under the CARES Act.

Link to IRS document.

 

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

The PPP Loan Program Extended

The Paycheck Protection Program (PPP) resumed accepting applications on July 6th, following the President signing the program’s extension over the July 4th weekend. According to the Small Business Association (SBA), approximately $130 billion allocated for PPP was left untapped once the original June 30th deadline expired. Small businesses now have an additional five weeks to apply for loans or until August 8th.

 

The SBA reported that 4.8 million businesses received funds, totaling $520 billion of the original $670 billion PPP funds authorized by Congress this past March. Businesses with fewer than 500 employees may apply for a PPP loan through any existing SBA 7(a) lender or FDIC bank, federally insured credit union, and Farm Credit System institution that is participating in the program.

 

Total loan forgiveness is available to businesses who prove they have suffered a 50 percent or more revenue loss, due to the pandemic. Additionally, at least 60% of the PPP funds must be spent on payroll costs, while the other 40% may be allocated for assistance with rent, utilities, and interest on mortgages.

 

Congress is expected to address further emergency relief funding in late July, as well as ways to repurpose any leftover funds. Lawmakers have also discussed the possibility of permitting businesses with fewer than 100 employees to apply for a second loan, as well as sole proprietorships and self-employed individuals, provided they have exhausted their original PPP loan.

Link to the SBA Application.

 

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

IRS Expands Eligibility on COVID-19 Distributions from IRAs

The IRS expanded its guidelines on June 20th with Notice 2020-50 that allows additional qualified individuals to take a coronavirus-related distribution (CRD) while avoiding the usual restrictions on early IRA distributions. Under the CARES Act, qualified individuals may receive favorable treatment for IRA distributions up to $100,000 from eligible retirement plans (i.e. 401k/403b and 457s) until December 31, 2020. Additionally, the 10% tax on early distributions is waived for any CRD if the distribution is taken before the account holder reaches 59 ½.

The Notice expands eligibility of “qualified individual” under the CARES Act

The original Act indicates a qualified individual is someone diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19 by a CDC approved test or a person who experienced adverse financial consequences resulting from being quarantined, furloughed or laid off or having hours reduced, unable to work due to lack of child care or closing or reduced hours for a business owned by the individual, any as a result of COVID-19.

The definition of “qualified” was expanded to include the individual and/or spouse, or a member of the individual’s household who had a job offer rescinded or start date delayed due to COVID-19. Additionally, a qualified individual includes someone whose income is affected by COVID-19 because a spouse or other household member (sharing the principal residence) experienced an income reduction due to COVID-19.

Also qualifying are household members unable to work due to lack of childcare because of COVID-19, as well as business owners/operators who lose income due to closing or reducing hours of business due to COVID-19.

Notice 2020-50 clarifies that while it is optional for employers and plans to designate distributions as COVID-related, qualified individuals whose distributions meet the above requirements will still receive this favorable federal tax treatment, even if a distribution is not classified as a CRD by the employer.

The CARES Act also provides somewhat of a tax holiday to a Qualified Individual

While a distribution from a qualified retirement plan is generally included in taxable income in the year of distribution, the CARES Act permits a qualified individual to include a CRD in taxable income ratably over a three-year period.  Notice 2020-50 clarifies this is an election on the part of the qualified individual who may choose instead to include the entire CRD in taxable income in the year of receipt; however, this election may not be changed. All CRDs must be treated in the same manner as reflected on the qualified individual’s 2020 tax return.

Additionally, the CARES Act permits a qualified individual to re-contribute a CRD to a qualified retirement plan. Unlike the tax treatment of a CRD, whether a CRD will be re-contributed to a qualified retirement plan or the manner in which it will be re-contributed, does not have to be determined before the filing of the qualified individual’s 2020 tax return.  Notice 2020-50 says that the decision can be made at any time during the three-year period and provides for the filing of amended returns to reflect the re-contribution of all or a portion of the CRD.

Link to IRS Notice 2020-50

 

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.