General loan forgiveness: This section contains three FAQs. The first one clarifies that sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to (and should) use the PPP Loan Forgiveness Application Form 3508EZ.
Loan forgiveness payroll costs: This section contains eight FAQs. Question No. 8 addresses how to determine the amount of owner compensation that is eligible for loan forgiveness. The answer provides examples for owners of C and S corporations, self-employed Schedule C (or Schedule F) filers, general partners, and LLC owners. It also defines an owner-employee as someone who is both an owner and an employee of a C corporation. The term was referred to in the PPP loan forgiveness application but not previously defined. Also addressed are partial pay periods, group health care benefits, and two questions related to payroll costs that were incurred or paid outside of the eight-week or 24-week covered periods.
Loan forgiveness non-payroll costs: This section includes seven FAQs. No. 6 provides that payments of transportation utility fees assessed by state and local governments are eligible for loan forgiveness. Also addressed are two questions related to non-payroll costs that were incurred or paid outside of the eight-week or 24-week covered periods and whether the Alternative Payroll Covered Period for payroll costs also applies to non-payroll costs (it doesn’t).
Loan forgiveness reductions: This section includes five FAQs. No. 4 explains how borrowers should calculate the reduction in their loan forgiveness amount arising from reductions in employee salary or hourly wage. Three examples of the salary/hourly wage reduction are included.
Status of the deductibility of PPP expenses
In addition, the AICPA is continuing to push for the deductibility of PPP expenses as referenced in the following excerpt from the Journal:
In a letter dated Aug. 4, 2020, the AICPA joined over 170 organizations to urge Congress to “include a technical correction addressing the tax treatment of loan forgiveness under the Paycheck Protection Program (PPP)” in its next round of legislation addressing the coronavirus pandemic.
The letter, addressed to House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Mitch McConnell, R-Ky., explained, “When the PPP was adopted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, [P.L. 116-136,] Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting canceled indebtedness excluded from the borrower’s taxable income.”
Nonetheless, despite Congress’s intent, the IRS issued Notice 2020-32 denying tax deductions for amounts paid under the PPP that were forgiven, claiming that treatment was necessary to prevent taxpayers from receiving a double benefit. But the coalition letter explains that is not true. As an example, it mentions a business that has $100,000 of PPP loans forgiven and excluded from its income, but then is required to add back $100,000 of denied business expenses. The result is the same as if the loan forgiveness was fully taxable. Section 1106(i) of the CARES Act becomes moot if Notice 2020-32 is allowed to stand.
The letter also noted that, aside from the significant tax increase of about $100 billion that many struggling businesses will face as a result of the IRS’s mistaken interpretation, businesses are now also recognizing other issues raised by the IRS’s position.
Those issues include how the denial of deductible wages would affect the Sec. 199A deduction or the work opportunity tax credit; how taxpayers would offset expenses incurred in 2020 with loan forgiveness realized in 2021; and how disallowed interest expense would be treated under the excess business interest expense limitation under Sec. 163(j).
We will continue to keep you updated as more information is released.