The IRS has issued new guidance (IRS Notice 2020-32) that Taxpayers who receive loan forgiveness of some or all of a PPP Loan will not be allowed a tax deduction for the corresponding expenses. As a result, accounting for PPP Loan proceeds and expenses just got a lot more challenging.
The IRS issued this Notice to clarify that a Taxpayer may not claim a business deduction for otherwise allowable PPP Loan expenditures to the extent that such loan proceeds were forgiven under the SBA PPP Loan Program. For example, if a Taxpayer borrowed $10,000 under the PPP Program and the funds were fully used for allowable expenses: (1) payroll costs, (2) certain employee benefits relating to healthcare, (3) interest on mortgage obligations, (4) rent, (5) utilities, and (6) interest on other existing debt obligations, these business expenses will not be deductible for income tax reporting up to the amount of the loan forgiveness received.
Taxpayers seeking loan forgiveness will be required to prove to the SBA Lender that the funds borrowed were used only for allowable expenses. Now, under the new IRS Notice they must also be able to properly compute the amount of loan forgiven in each general ledger expense account in order to satisfy IRS tax reporting requirements. As a result, it is highly recommended that PPP Loan borrowers establish a separate bank account exclusively for PPP Loan proceeds and for the payment of allowable PPP expenditures.
Also recommended is establishing new general ledger accounts to tract and record allowable expenditures to make year-end tax reporting much easier when determining allowable versus unallowable business expenses. This will also provide a much needed audit trail for a borrower to prove to the SBA Lender its loan forgiveness amount. At this point the SBA has not issued guidance on how it intends to audit these PPP loans but they have cautioned borrowers that there will be severe penalties for improper use of these funds.
We will continue to provide regular client updates on future SBA and IRS guidance as the government continues to offer various interpretations of the PPP loan program implementation. One thing that is clear, good recordkeeping will be critical for maximizing any loan forgiveness and avoiding IRS penalties. Please contact Bob Cohen at email@example.com should you have any questions relating to PPP Loans and the new IRS rules.