New Guidelines from the IRS

Late last week, the IRS issued Notice 2020-32, which is linked here:

The question addressed in the Notice is this: If PPP loan funds are forgiven, are the expenses paid with PPP money deductible from gross income. The IRS answers NO.

Typically, expenses like payroll are deductible from gross income. For the reasons explained in the IRS Notice, PPP loan funds that become forgiven will be excluded from gross income, and the expenses paid with those funds will not be deductible. In a general sense, this makes the employer simply a pass-through of PPP dollars. However, an employer might incur expenses in receiving PPP funds and then paying them to employees. The most obvious example might be incurring state tax liability on employee wages. There are other examples, but sticking with this one, if an employer used all of its PPP funds to pay qualified expenses other that state tax, it would then be liable to pay state tax out of other funds. This simply means the pass-through is not without cost to the employer. Please note that payment of state or local tax assessed on the compensation of employees is a qualified “payroll cost” for which PPP funds can be used, so it may be possible to avoid unintended costs but only with careful planning.

Several constituencies, including the American Institute of CPAs, are seeking to challenge the IRS’s decision. But in the meantime, employers’ 8-week periods in which to spend the PPP funds on forgivable expenses is already running in many instances.

So what does this mean as a practical matter? All employers, but especially employers who have laid off or furloughed staff and who intend to use PPP funds to pay them without fully re-engaging them for employment, need to discuss use of PPP funds with their tax advisor to avoid or minimize unexpected expenses.

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