IRS NOTICE 2020-32

[Lee B]

"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)

According to the IRS, Sec. 265(a)(1) prohibits an otherwise allowable deduction under any provision of the Code, including Secs. 162 and 163, for the amount of any payment of an eligible Section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because that payment is allocable to tax-exempt income. This is consistent with the purpose of Sec. 265 to prevent a double tax benefit. The IRS cited Rev. Rul. 83-3 for the proposition that deductions must be decreased to the extent the associated expense is allocable to amounts excludable from gross income."

Copied from Forbes:  "The Paycheck Protection Program offers an alluring loan of up to $10M tax free. If you comply, you don’t even have to pay it back. What’s more, there is no forgiveness of debt income when your loan is forgiven, something that is standard fare if you are relieved of paying back debt. However, IRS Notice 2020-32 confirms you can’t claim tax deductions, even for the wages, rent, etc. that are normally fully deductible. The CARES Act provisions for small business include the Paycheck Protection Program, which calls for up to $10 million in forgivable loans to cover employee payroll, and immediate tax credits that are designed to do the same thing.

AICPA Position:

"The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses.

The AICPA believes strongly that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent. Chris Hesse, CPA, chair of the AICPA Tax Executive Committee, said: “In effect, the IRS guidance means that the taxability provision [Section 1106(i)] has no meaning. Why waste the ink to say that for purposes of the Code, the loan forgiveness is not includible in income, if the government will just take away deductions in the same amount?”

Because it believes the intent of the CARES Act was to allow businesses to deduct all of their ordinary and necessary expenses — including any expenses used in determining PPP covered costs — the AICPA plans to seek legislative clarification. “We’re hopeful that we’ll see movement on the legislative front early next week,” according to Edward Karl, CPA, AICPA vice president–Tax Policy & Advocacy."

I was just thinking about the potential  impact on a Schedule C Taxpayer who could have to pay both additional  Income Tax and SE Tax on these non deductible expenses. 

The moral of this story is:

1.  Sometimes what seems to be too good to be true . . . . . . . 

2.  Always look inside your boots before you put them on  . . . . . .

3.  Sometimes there actually is a lump of coal in your Xmas Stocking 

 

 

[RitaB]

This makes sense.  I can only see two logical ways of dealing with the forgiven amounts (grant) designed to keep your employees tied to your business while receipts are down:

1) Include the grant as income and deduct the expenses paid by it.

2) Exclude the grant from income and don't deduct the expenses paid by it.

Business is business.  And, yes, if you received a grant while your gross receipts did not suffer as much as the grant amount, your net income is higher.  And your tax bill is higher.  Your business made money.  Surely we can explain this just as we educate the ones who call asking if they should take a raise at work. 

If not, they can return the money to save the tax. 

 

[JohnH]

I never thought of it as being any other way.  It would be absurd to allow a tax deduction for an expense which was paid by a third party.  If I volunteer to pay my client's payroll and rent, common sense would indicate they wouldn't expect to take a tax deduction for it.  

[Terry D EA]

On 5/2/2020 at 10:37 PM, JohnH said:

I never thought of it as being any other way.  It would be absurd to allow a tax deduction for an expense which was paid by a third party.  If I volunteer to pay my client's payroll and rent, common sense would indicate they wouldn't expect to take a tax deduction for it.  

I too would have never thought anything different. I guess the key word is "common sense"

[Randall]

I agree but there is one situation that irks me.  Ministers' housing allowance.  The amount used to pay a mortgage is non-taxable and the amount paid for mortgage interest (and real estate tax) is also deductible.  Sort of a double tax advantage for the same dollar.  May not be as applicable now with the higher standard deductions but still annoying to me.

[RitaB]

1 hour ago, Randall said:

I agree but there is one situation that irks me.  Ministers' housing allowance.  The amount used to pay a mortgage is non-taxable and the amount paid for mortgage interest (and real estate tax) is also deductible.  Sort of a double tax advantage for the same dollar.  May not be as applicable now with the higher standard deductions but still annoying to me.

I agree, this is absolutely an allowed double dip.  Also, I have a minister whose family received APTC (100% of premiums for five paid by the taxpayers) and Retirement Savers Credit because 17,500 of his income was excluded as HA.   I don't blame the pastor.   He's a very nice guy, does not appear to hate paying Caesar the small [to me] amount he owes, is not impoverished, and his wife is able to stay home with the kids.  This is the wrong thread, but we were on cricket mode, so I'll pile on.   

[Lee B]

AICPA supports bill that would make PPP-funded expenses deductible

By Alistair M. Nevius, J.D.

"Legislation introduced in the Senate on Tuesday would overrule an IRS notice and clarify that ordinary expenses funded by Paycheck Protection Program (PPP) loans are deductible by taxpayers. The bill, the Small Business Expenses Protection Act of 2020, S. 3612, is currently in the Senate Finance Committee and is supported by the AICPA.

The PPP was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136. Under Section 1106(b) of the CARES Act, an eligible recipient of a covered loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the eight-week covered period beginning on the covered loan’s origination date: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation; (3) any payment on any covered rent obligation; and (4) any covered utility payment. Section 1106(i) excludes from gross income any amount forgiven under the PPP.

The IRS last Thursday issued Notice 2020-32, which says that taxpayers receiving loans through the PPP are not permitted to deduct normally deductible expenses to the extent the expenses were reimbursed by a PPP loan that was then forgiven. The IRS notice reasoned that Sec. 265(a)(1) prohibits an otherwise allowable deduction under any provision of the Code, including Secs. 162 and 163, for the amount of any payment of an eligible Section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because that payment is allocable to tax-exempt income.

If enacted, S. 3612 would overturn that position and allow taxpayers to deduct covered expenses paid or incurred by an eligible recipient of a PPP loan that is forgiven under Section 1106(b).

On Tuesday, the AICPA sent a letter to Sens. Tom Carper, D-Del., John Cornyn, R-Texas, Charles Grassley, R-Iowa, Marco Rubio, R-Fla., and Ron Wyden, D-Ore., commending their efforts and supporting S. 3612."