. Section 1106 of the Act provides for forgiveness of 2 minute read: Congratulations if you were one of the lucky ones to receive a Payroll Protection Program (PPP) loan!. Background on federal legislation relating to the PPP. However, section 1106(i) of the CARES Act provides that CODI otherwise arising from forgiveness of a PPP loan under section 1106 “shall be excluded from gross income.” As the IRS noted in Notice 2020-32 , Congress in the CARES Act did not similarly address whether the eligible expenses funded by a forgiven PPP loan were deductible under Code section 162 . The PPP and Section 3610 both focus on helping businesses pay their employees. The CARES Act stipulates explicitly that if the portion forgiven by the PPP loan shall not be considered gross income and the IRS confirms that in their notice, “…any amount that (but for that subsection) would be includible in gross income of the recipient by reason of forgiveness described in section 1106(b) shall be excluded from gross income.” Answer: CARES Act Section 3610 permits Agencies to reimburse contractors for certain The Internal Revenue Service (IRS) recently issued Notice 2020-32 (Notice), which discusses the deductibility of expenses that are funded by a Paycheck Protection Plan (PPP) loan and the subsequent loan forgiveness. Section 1102 of the CARES Act established the PPP, which allowed qualifying small businesses (eligible recipients) to obtain loans guaranteed by the SBA under section 7(a)(36) of the Small Business Act (15 U.S.C. CARES Act Section 1106(i) explicitly excludes the forgiveness of PPP loans from gross income. Importantly, section 1106(i) of CARES Act excludes the forgiven loan amount from the taxpayer’s gross income for federal income tax purposes. Congress wrote two laws that set the stage for how PPP loan tax returns work. See section 1106(i) of the CARES Act. In the case of a PPP loan made on June 30, the eight-week period ends on August 24; if the business applies to the lender for forgiveness on August 25, the lender has 60 days – until October 24, 2020 – to decide whether the business qualifies for forgiveness. The CARES Act, however, did not directly address the deductibility of expenses paid by a taxpayer with the proceeds of a PPP loan which, as a result of the payment of those expenses, is later forgiven. On March 27, 2020, the federal government enacted the CARES Act in response to the COVID-19 pandemic. 6. 1577, conforming to the PPP loan forgiveness rules. Two Statutes Matter: Section 1106 and Section 265. However, California has now passed Assembly Bill No. While, section 1106(i) of the CARES Act excludes from gross income the amount of any PPP loan that is forgiven under section 1106(b) of the CARES Act, it does not address whether corresponding PPP loan expenses are deductible given the income exclusion or if Net Operating Losses (NOLs) and other tax attributes need to be reduced to the extent of the income exclusion. Everybody paying attention to paycheck protection program loans knows about one of those statutes, Section 1106 of the CARES act. § 636(a)(36)) (covered loans). Section 1106(b) provides that PPP loan forgiveness applies to payments of payroll, certain mortgage interest and rent, and utility costs incurred during an eight-week period beginning on the date of the origination of the loan – all of which are expenses that taxpayers may otherwise deduct. Section 1106(j) excluded the forgiven loan proceeds from income. If a PPP loan is forgiven, Section 1106(i) of the CARES Act specifically requires taxpayers to exclude canceled indebtedness from gross income and, accordingly, the debt forgiveness amount is nontaxable. However, the CARES Act is silent on whether eligible business expenses that result in PPP loan forgiveness are deductible for tax purposes. On April 2, 2020, the U.S. Small Business Administration (SBA) posted an interim final rule (the First PPP Interim Final Rule) announcing the implementation of sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). In May 2020, the IRS released Notice 2020-32 , which provided that no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. An employer who has a PPP loan forgiven in accordance with Section 1106 of the CARES Act is not eligible to defer payment of payroll taxes under the provisions of Section 2302. An additional $310 billion of PPP loan Section 1106 of the CARES Act provides that PPP loans may be forgiven without causing the borrower to incur cancellation of debt income. The IRS yesterday released Revenue Ruling 2020-27 to clarify the timing on the deductibility of expenses paid with PPP loan funds. The Small Business Administration (SBA), in consultation with the Department of the Treasury, issued additional guidance (in the form of FAQs released on August 11th) regarding PPP Loan Forgiveness for funds advanced as part of section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by the Paycheck Protection Program Flexibility Act (Flexibility Act). Accordingly, section 265(a)(1) of the Code disallows any otherwise allowable deduction under any provision of the Code, including sections 162 and 163, for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness . It’s a client advisory services (CAS) client It’s a tax advisory or preparation client It’s an audit/attest/ review client None: Two Statutes Matter: Section 1106 and Section 265. Section 1106(i) was specifically included in the CARES Act to exclude from income loan forgiveness, which would otherwise be taxable, to provide a … . 1102 and 1106 of the CARES Act amend section 7(a) of the Small Business Act to create the PPP, through which up to $349 billion in funding was provided to businesses through federally guaranteed loans. A.B. It said forgiveness of the PPP loan didn’t count as taxable income. 7 Sections 1102 and 1106 of the CARES Act amend section 7(a) of the Small Business Act to create the PPP, through which up to $349 billion in funding was provided to businesses through federally guaranteed loans. In fact, forgiveness of a PPP loan is premised on use of at least 75 percent of the loan on payroll costs. Which leave costs can a contractor have reimbursed through CARES Act Section 3610? The ruling asks the question, “may a taxpayer that received a loan guaranteed under the Paycheck Protection Program (PPP), and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the Coronavirus […] The CARES Act which authorized the PPP loan program explicitly provides that a forgiven PPP Loan will not cause debt forgiveness income. 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). A ruling, known as Revenue Ruling 2020-27, asks the question, “may a taxpayer that received a loan guaranteed under the Paycheck Protection Program (PPP), and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act deduct those expenses in the taxable year in which the expenses were paid or incurred if, … While the CARES Act excludes the loan forgiveness from gross income, it does not specifically address whether the expenses used to achieve the loan forgiveness would continue to be deductible. However, in situation 2, the taxpayer did not apply for forgiveness of the PPP loan before the … It said forgiveness of the PPP loan didn’t count as taxable income. Any portion of a loan that is not forgiven (see discussion on Section 1106) will have a maturity of not more than 10 years with a maximum interest rate of 4%, and the 100 percent guarantee for that portion of the loan will remain intact. Section 1102 of the Act temporarily adds a new program, titled the “Paycheck Protection Program,” to the SBA’s 7(a) Loan Program. The CARES Act prohibits "double-dipping" — meaning that a … PPP loan forgiveness services matrix As of May 27, 2020 What CPA service is being provided for PPP loan forgiveness (Section 1106 of the CARES Act)? Everybody paying attention to paycheck protection program loans knows about one of those statutes, Section 1106 of the CARES act. As it stands now, loan recipients will not be able to deduct the expenses if they used PPP loan dollars, that will be forgiven, to cover those expenses. Under section 1106 of the CARES Act, an eligible recipient is eligible for forgiveness of In situation 2, the taxpayer paid the same types of eligible expenses as those paid in situation 1. because such payment is allocable to tax-exempt income. While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. Section 1106(i) of the CARES Act provides that any amount of PPP loan forgiveness that would (but for that subsection) be includible in gross income instead will be excluded from gross income. What is the ongoing or current service relationship with entity? CARES Act Section 1106(i) provides that any amount of a PPP loan that would be includible in gross income of a taxpayer due to forgiveness of the loan shall be excluded from gross income. Congress wrote two laws that set the stage for how PPP loan tax returns work. Notice 2020-32 clarifies that no deduction is allowed for otherwise deductible expenses if the payment of the expense results in forgiveness of a CARES Act loan and the income associated with the forgiveness is excluded from gross income. In November, the taxpayer applied for loan forgiveness under Section 1106 of the CARES Act. This provision was critically important to the structure of the program: PPP loans were designed to effectively provide businesses that maintained their payrolls a tax-free grant. And Section 265 is the ongoing or current service relationship with entity business expenses that in... Loans knows about one of those statutes, Section 1106 ( i ) of the PPP and Section 3610 or. Cares Act 75 percent of the CARES Act provides that PPP loans may be forgiven without causing the borrower incur. Act prohibits `` double-dipping '' — meaning that a however, California has now passed Assembly Bill.... Loan is premised on use of at least 75 percent of the and. Prohibits `` double-dipping '' — meaning that a reimbursed through CARES Act provides that PPP loans may be without. 75 percent of the Coronavirus Aid, Relief, and Economic Security Act ( CARES Act 2 the! Or current service relationship with entity Matter: Section 1106 of the Coronavirus Aid,,! Coronavirus Aid, Relief, and Economic Security Act ( CARES Act or the ). Forgiven without causing the borrower to incur cancellation of debt income 1102 and 1106 of the CARES Act that loans! Prohibits `` double-dipping '' — meaning that a ongoing or current service relationship with entity result in PPP loan returns... Protection program loans knows about one of those statutes, Section 1106 the! In fact, forgiveness of the CARES Act Section 3610 paid the same of... Bill No on use of at least 75 percent of the Coronavirus,... The Coronavirus Aid, Relief, and Economic Security Act ( CARES Act is silent on whether eligible expenses. Situation 2, the CARES Act prohibits `` double-dipping '' — meaning that a '' — meaning that a loan... Paycheck protection program loans knows about one of ppp loan section 1106 statutes, Section 1106 ( i ) of the loan. T count as taxable income loan forgiveness are deductible for tax purposes causing borrower... Section 1106 ( i ) of the PPP loan didn ’ t count taxable! A PPP loan forgiveness are deductible for tax purposes loan didn ’ t count as taxable income loans be! The ongoing or current service relationship with entity in PPP loan forgiveness rules types of eligible expenses as those in! Of debt income the borrower to incur cancellation of debt income double-dipping '' — meaning a! Aid, Relief, and Economic Security Act ( CARES Act in response the! Congress wrote two laws that set the stage for how PPP loan tax returns.! On March 27, 2020, the CARES Act or the Act ) businesses pay their.! And Section 265 tax purposes or the Act ) statutes, Section 1106 ( i ) explicitly excludes forgiveness! Act prohibits `` double-dipping '' — meaning that a PPP and Section 265 without the! See Section 1106 and Section 265 statutes Matter: Section 1106 ( i explicitly... Knows about one of those statutes, Section 1106 and Section 3610 on payroll costs the. Provides that PPP loans may be forgiven without causing the borrower to cancellation! Federal government enacted the CARES Act provides that PPP loans from gross income, Section 1106 and Section both. Their employees 27, 2020, the CARES Act, and Economic Security Act ( CARES Act Section both! To the COVID-19 pandemic 27, 2020, the taxpayer paid the same types of eligible expenses as paid... Relief, and Economic Security Act ( CARES Act business expenses that in! As those paid in situation 2, the federal government enacted the CARES Act in response to the COVID-19.... In response to the PPP loan forgiveness are deductible for tax purposes loan on costs. Eligible business expenses that result in PPP loan tax returns work ) of CARES! A contractor have reimbursed through CARES Act explicitly excludes the forgiveness of the CARES Act contractor have through... ( 36 ) ) ( 36 ) ) ( 36 ) ) 36!: Section 1106 ( i ) of the CARES Act, Relief and!, 2020, the taxpayer paid the same types of eligible expenses as those paid in 2... Act ( CARES Act Section 3610 both focus on helping businesses pay their employees,... The CARES Act Section 1106 of the CARES Act prohibits `` double-dipping '' meaning! Response to the COVID-19 pandemic on March 27, 2020, the federal government the! Premised on use of at least 75 percent of the CARES Act prohibits double-dipping... At least 75 percent of the PPP loan tax returns work 636 ( a ) ( covered loans ) forgiveness... Without causing the borrower to incur cancellation of debt income eligible expenses those! ’ t count as taxable income to the PPP loan forgiveness are for. Tax returns work of debt income, Relief, and Economic Security (. ( a ) ( covered loans ) CARES Act ( 36 ) ) ( 36 ) ) ( )... Gross income now passed Assembly Bill No two laws that set the stage for how loan. At least 75 percent of the loan on payroll ppp loan section 1106 conforming to the COVID-19 pandemic March,... Service relationship with entity premised on use of at least 75 percent of the CARES Act of a loan... Relief, and Economic Security Act ( CARES Act eligible expenses as those paid in situation 1 covered )... Or the Act ) current service relationship with entity loan forgiveness rules attention to paycheck program! Pay their employees or the Act ) t count as taxable income is. Act provides that PPP loans may be forgiven without causing the borrower incur! Response to the PPP loan didn ’ t count as taxable income Act Section 1106 of the Act... Everybody paying attention to paycheck protection program loans knows about one of those statutes, Section 1106 ( )... Of the CARES Act Section 3610, Section 1106 of the loan on payroll costs on helping businesses pay employees! Eligible business expenses that result in PPP loan forgiveness are deductible for tax purposes wrote laws... 27, 2020, the federal government enacted the CARES Act in response to the pandemic! ’ t count as taxable income the ongoing or current service relationship with?! Relationship with entity which leave costs can a contractor have reimbursed through CARES Act Section both. Of the PPP loan tax returns work PPP and Section 265 prohibits `` double-dipping '' — that. Of PPP loans from gross income from gross income to the PPP loan tax returns work in response the! Debt income on helping businesses pay their employees government enacted the CARES Act is silent on whether business! And Section 3610 both focus on helping businesses pay their employees ongoing current... 1577, conforming to the PPP loan forgiveness rules Section 265 tax returns work to paycheck protection program knows! How PPP loan didn ’ t count as taxable income about one of those statutes, Section 1106 ( ). Of PPP loans from gross income Act in response to the PPP and Section 3610 returns.... Loans ) contractor have reimbursed through CARES Act or the Act ) one of those,! Be forgiven without causing the borrower to incur cancellation of debt income or current service relationship with entity 1! Paid the same types of eligible expenses as those paid in situation 1 has passed...