On May 5, 2020, three senators who are leaders of their respective congressional tax-writing committees asked Treasury in a letter to reverse Notice 2020-32 issued last week denying deductions for certain small business expenses that are subject to loan forgiveness. Section 1102(a) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-127 (2020) (“CARES Act”) sets forth rules for forgiveness of certain covered loans to small business employers under the Paycheck Protection Program (“PPP”) administered by the United States Small Business Administration (“SBA”). CARES Act section 1102 added paragraph (36) to section 7(a) of the Small Business Act, as amended (the “Act”).
Generally, a covered loan (“PPP loan”) amount for costs and payments incurred during the covered period, or the 8-week period beginning on the origination date, may be forgiven, subject to certain limitations. Pursuant to SBA guidance published on April 15, 2020, non-payroll costs may not exceed 25 percent of the forgiven loan amount. Payroll costs subject to a PPP loan exclude qualified sick or family leave paid by a small business employer subject to a refundable credit under the Families First Coronavirus Response Act, Pub. L. No. 116 – 127 (2020) (“FFCRA”). In addition, if a taxpayer receives a PPP loan, the taxpayer would not be eligible for an employee retention credit of up to 50 percent of $10,000 per employee of certain qualified wages for all calendar quarters, allowed under CARES Act section 2301. Similarly to a taxpayer that receives an employee retention credit under the CARES Act but by contrast to a taxpayer allowed an FFCRA payroll credit, a recipient excludes the amount of PPP loan forgiveness from gross income under section 1106(i) of the CARES Act. Generally, factors to consider in analyzing the tax benefits of each program may vary for taxpayers and tax-exempt organizations that, unless subject to unrelated business income tax, may be indifferent to income inclusion.
On April 30, 2020, the IRS issued Notice 2020-32, which provides generally that an employer may not deduct business expenses paid using PPP loan proceeds, to the extent that any forgiven portion of the PPP loan is excluded from gross income of the employer under section 1106(i) of the CARES Act. The purpose of the guidance is to prevent a double tax benefit to the employer. Pending Treasury or legislative action on Notice 2020-32, eligible employers, which include tax-exempt organizations should consult with counsel regarding tax benefits with respect to applicable qualified paid leave requirements and related credits under the FFCRA, employee retention credits under the CARES Act or PPP loan forgiveness with respect to payroll costs of the eligible employer.