Let’s discuss the Paycheck Protection Program (PPP) loan initiative enacted under the CARES Act to keep small businesses afloat during COVID-19. The PPP lets small businesses borrow up to 250% of their average monthly payroll to cover payroll, utilities, rent, and interest. If the loan proceeds are used for these specific expenses during the 24-week period following disbursement of the loan, then the loan need not be repaid, provided that at least 60% of the proceeds are used for payroll.
The CARES Act says that forgiven PPP loans are nontaxable. The law is silent on whether expenses paid with forgiven PPP funds are deductible. So, the IRS issued an administrative ruling which said that to prevent a double tax benefit, the expenses are not deductible. Businesses with PPP loans are pleading with Congress to reverse the ruling and the lawmakers are listening. The Senate is trying to pass a narrow bill that would reverse the IRS ruling and many House members are also in agreement. I am telling my clients to book the receipt of the PPP loan and the subsequent disbursements as follows. Upon receipt of the loan proceeds, you should debit cash and credit Note Payable – PPP. As you spend your loan proceeds, you should credit cash and debit Note Payable – PPP. This will have no effect on the Income Statement and will comply with the IRS ruling. I would advise keeping a list of all your expenses in a separate file off the books.
Keep a close eye on your net income because if the loan proceeds and the related non-deductible expenses exceed your reduction in revenues then you could have a large increase in your taxable income. If Congress reverses the IRS, then you will have a huge benefit. I will keep you posted.