Businesses Await Answers

No Tax Deduction for Expenses Paid with Forgiven PPP Funds

A tax surprise could be around the corner for business owners who participate in the federal government’s forgivable loan program — unless Congress intervenes.

The PPP was created by the CARES Act, which provides that an eligible recipient of a covered loan could qualify for forgiveness of the indebtedness if certain criteria are met. What’s more, the forgiven loan is not included in taxable income.

Initially, this sounded like a win-win situation for taxpayers: free money to help them get through the unexpected economic challenges created by the coronavirus pandemic. There’s a catch, however. The Internal Revenue Service released Notice 2020-32 and decisively ruled that expenses allocable to the forgiven PPP loan proceeds are not deductible. This means business owners who take the loan won’t be able to write off expenses that would otherwise be deductible if they use the PPP proceeds to cover the cost and get forgiveness.

As businesses review their profit, they will need to consider the nondeductible expenses for tax planning purposes.

Some members of Congress have expressed publicly that their intent was to have both tax-free forgiveness and deductibility of the business expenses. Such a result will most likely need to be achieved through legislative action. It is possible that a future economic response bill will attempt to ensure the deductibility of expenses paid with forgiven PPP funds.

Trump’s Executive Order on Payroll Taxes

In President Donald Trump’s signed memorandum, he issued a payroll tax holiday starting Sept. 1st and lasting until Dec. 31st. This payroll tax holiday technically is only delaying the deadline for paying the worker’s share of the social security payroll tax. The delay is not that different from when the administration postponed the tax-filing deadline this year until July 15, because of the coronavirus outbreak. The money would eventually have to be repaid, though the order doesn’t say when. Trump is betting Congress won’t let that happen and will eventually step in to forgive the tax altogether.

Much of the memo leaves the specifics of the payroll tax holiday to the Treasury Secretary. The memo appears to leave the decision to participate in the initiative up to the employers.

Employers are responsible for paying all payroll taxes to the IRS. This leaves employers with several questions. What happens if, for example, a company has deferred payroll taxes for a worker who then quits in December? Who would have to pay the taxes owed? Or what would happen if Congress doesn’t forgive the taxes, and businesses must impose steep increases in tax withholding next year to pay the deferred tax bills? Could their workers afford that?

In addition, it could be a hassle for employers to implement. The payroll tax holiday would only be for workers making less than $4,000 per bi-weekly pay. Some employees receive their compensation in the form of monthly or annual bonuses.

Businesses are left waiting for the Treasury Department to spell out the details for how the plan would work before deciding how to proceed and September 1st is fast approaching.

Wall Titus will continue to update you as we learn more.

AccountingLingering Tax Related Coronavirus Legislation