Guidance on IRS Notice 2020-32 and the implications to the PPP
October 12, 2020|CARES Act, Paycheck Protection Program, PPP
From Notice 2020-32:
“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.”
The IRS released Notice 2020-32 to provide guidance on deducting certain expenses paid for by PPP loans. Under this notice, expenses that have been claimed as a deduction in previous years will not this year if PPP funds were used. With Q4 well underway and plans being put in place for closing out 2020, we want to make sure you are aware of the possible implications the forgivable PPP loans have on your business and claiming the R&D credit.
As a refresher, the Paycheck Protection Program was established by Section 1102 of the CARES Act to provide relief to businesses affected by the economic impacts of the Coronavirus outbreak. Under the Paycheck Protection Program the loan may be used for:
Payroll costs
Employee benefits relating to healthcare
Interest on mortgage obligations
Rent
Utilities
Interest on other existing debt obligations
“Under section 1106(b) of the Cares Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan (covered loan forgiveness) in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the covered loan’s origination date (each, an eligible section 1106 expense)”:
Payroll Costs
Payment of interest on any covered mortgage obligation
Payment on covered rent obligation
Covered utility payments
The money companies received as a loan by the government is forgivable and is not counted as gross income. Since the loan is not counted as income, claiming any one of the expenses above as a deduction would give way to a company receiving a double benefit.
Additionally, the amount of forgivable funds is reduced if during that 8 week period the number of employees or the wage of employees is reduced by more than 25% as compared to the last full quarter before the covered period.
Bottom Line
As you begin to make year-end plans, be sure to meet with your tax preparer to get ahead of changes to your tax situation. In regards to the R&D credit, this may provide some unexpected challenges when claiming the traditional buckets of qualified research expenditures. Schedule a meeting with the PTR team so we can walk through what this looks like for your company and put together a plan.