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.”
When the Payroll Protection Program was put into place a few months ago, there were some gray areas in regards to deducting expenses paid for my PPP loans. The IRS released Notice 2020-32 to provide guidance on deducting certain expenses to provide more color. We will be breaking down this notice and the implications it has on your return and the R&D tax credit.
To lay a foundation, the Payroll 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. PPP loan funds can be used for:
- Payroll costs
- Employee benefits relating to healthcare
- Interest on mortgage obligations
- Interest on other existing debt obligations
According to section 1106 of the Cares Act, if your company has received a loan you are eligible for loan forgiveness for all the payments made during the 8 week covered period. Forgivable expenses include the following:
- Payroll Costs
- Payment of interest on any covered mortgage obligation
- Payment on covered rent obligation
- Covered utility payments
Since this loan is forgivable, it is not counted as gross income. As a result, claiming one of the expenses above as a deduction would give way to a company receiving a double benefit.
Additionally, the number of employees or the wage of employees is reduced by more than 25% during the 8 week period as compared to the last full quarter before the covered period, the forgivable funds are reduced.
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. For the R&D credit, this may provide some unexpected challenges when claiming the traditional buckets of qualified research expenditures. Schedule a meeting with the TCH team so we can walk through what this looks like for your company and put together a plan going into next year.