COVID-19 UPDATE – HERE IS AN IMPORTANT CONSIDERATION TO ALL OF YOU WHO HAVE RECEIVED A PPP LOAN
The general rule for income taxes is that an amount of a loan or other financial obligation that is forgiven is taxable income to the person that was obligated. Part of the PPP loan enabling statute indicates that any forgiveness under the PPP will not cause the amount forgiven to be taxable. The IRS has just released a Notice (Notice 2020-32) that flies in the face of (or more accurately, does an end-run on) this provision.
The Notice concludes that while the amount forgiven is not taxable, any business expenses paid with the proceeds of such loan that otherwise would be deductible, will not be. So all payroll expenses, rent, utilities, etc., paid with the proceeds will not be deductible. Essentially, causing the amount forgiven to be taxable!
Here is the definition of Notices from the IRS website: Notice: A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.
While IRS Notices are not law, they do signal that the IRS plans on attacking taxpayers who try to deduct these expenses. Therefore, a conservative approach would be to plan to have to pay tax on the amount of the PPP proceeds that are forgiven. If the IRS loses on this argument, you will have a bonus.
You should consult with your tax advisor to discuss this more fully.