Updated 4/30/2020: In a notice released on April 29, the IRS has ruled that while PPP loan forgiveness is tax free under the CARES Act, the related expenses are not deductible. We had discussed the possibility of IRC 265 being referenced to deny those deductions in our webinar on April 30.
IRS Notice 2020-32 clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan amount and the income associated with the forgiveness is excluded from gross income under the CARES Act.
For self-employed individuals, the owner compensation equivalent amount that was utilized to develop their loan forgiveness amount was previously not deductible, so this notice will still allow those taxpayers to receive tax free loan forgiveness on that aspect of their loans.
It’s important to note that there is talk of Congress acting to nullify the IRS ruling here, and we haven’t heard from the IRS specifically on how they will treat PPP loan forgiveness for self-employed taxpayers. Right now, the entire situation is fluid and merits additional monitoring.
Economic Injury Disaster Loan – More Funding
There is more funding on the way – $60 billion worth. The previously updated grant rules still apply, meaning that aid will be limited to $1,000 per employee up to $10,000—if you get the money.
Nearly four million businesses applied for EIDL in the first two weeks of the expanded program – and it quickly went through the $10 billion originally allotted to it as part of the first small business plan.
And to further complicate things, the SBA announced this week it had notified 8,000 small-business owners about a software bug that may have exposed their personal information online. The bug has since been fixed, but it certainly further muddies a program which many small businesses were counting on to help.
There is no guidance in US accounting standards that specifically addresses the accounting by business entities for government assistance. Under US GAAP, a company may consider authoritative guidance from other sources (for example, guidance issued by other standard setters) if no guidance exists within US GAAP.
International Financial Reporting Standards provides guidance that is directly relevant to the accounting for loan forgiveness under the PPP. We have been advising clients to follow the guidance in IAS 20, which states: “A government grant is recognized as income over the period necessary to match the income with the related costs, for which they are intended to compensate, on a systematic basis.”
Accordingly, the loan forgiveness should be recognized in the periods in which the related costs are incurred (i.e. payroll, rent, utilities, mortgage interest, etc.). The fact that the loan forgiveness will not be formally approved until a later date should not preclude the recognition of the loan forgiveness as long as there is reasonable assurance that you complied with the conditions of the PPP and the calculation of loan forgiveness can be calculated with a reasonable degree of certainty.
You should estimate the amount of loan forgiveness using the guidance issued by the SBA at the end of each accounting period. Any changes in the amount of the loan forgiveness would be treated as a change in estimate and recorded in the accounting period in which the estimate changes.
IAS 20 goes on to state that a grant may be reported separately as other income or deducted from the related expense. We are recommending that the loan forgiveness be shown as other income.
We anticipate that the FASB and/or the SEC will provide some guidance shortly and will update this article when this becomes available.
Now that this latest round of additional funding has passed, leaders from both parties are already turning their focus on the next round of stimulus for the stalled U.S. economy, and have started to detail their goals for additional legislation as part of an unprecedented emergency response. So, there will be more coming.
We’ll continue to keep an eye on new guidance and updated rules as it relates to this new round of funding and will update this article once this information becomes available.