dedutibility of expenses paid with PPP proceeds

[lenboush]

I have a question about the deductibility of expenses paid with PPP proceeds. Normally, the principal is that you cannot deduct expenses paid for with tax free income. Following that logic, we cannot deduct the payroll, rent and utilities paid for with the PPP proceeds.
There is some precedent for double dipping but they are outside the norms of business deductions. On the personal side, two items come to mind; military housing allowance and minister’s housing allowance. They can still deduct mortgage interest and real estate taxes even though it is paid with tax free income. Again, I can’t think of any equivalent for tax free business income and deductions.
So, I have two questions:

1. Are those items going to be deductible or not since they are paid for with tax free dollars? I was in a webinar yesterday where the speaker said we could. I was surprised to hear that. What say you?
2. If we can deduct the items, how will we enter those in our bookkeeping?

[lenboush]

http://news.cchgroup.com/2020/04/22/paycheck-protection-program-loan-questions-concerning-loan-forgiveness/news/federal-tax-headlines/

[Lion]

I also heard instructors say, in two different webinars today (NAEA and NATP) the expenses are deductible and the loan/grant is not taxable. But, we expect forgiveness rules about 15 May. Makes it kinda hard to plan, huh?!

[BOB W]

PPP.... What happens if only 65% of 2019 payroll is paid out in the 8 week valuation period. Does the business only get that PORTION forgiven or is none OF THE LOAN FORGIVEN?

[Lion]

They could return the excess loan or keep it at 1% interest for two years. We don't have the details of forgiveness yet, but the broad strokes are 75% used for payroll, limits on reductions of wages, limits on reductions of employees, Can use payments of rent and utilities and...for up to 25%. Some say forgiveness regulations will be out this week or by 6 May or by 15 May. Wait. Be patient. Keep Calm & Carry On.

[New York Enrolled Agent]

I also heard instructors say, in two different webinars today (NAEA and NATP) the expenses are deductible and the loan/grant is not taxable. But, we expect forgiveness rules about 15 May. Makes it kinda hard to plan, huh?!

It appears both webinars were incorrect. The IRS issued Notice 2020-32 today.

[BOB W]

https://www.irs.gov/pub/irs-drop/n-20-32.pdf

https://argifinancialgroup.com/wp-content/uploads/2020/04/CARES-Act-Section-1106-Loan-Forgiveness.pdf

[Lion]

I read Notice 2020-32 late this afternoon. Not unexpected. But, not what I was hoping for for my biz clients that are struggling. But, it follows current law about not deducting expenses paid with nontaxable income, and it does keep the COD as NOT income as we've been told all along, so that's something. It's good to get one more piece of the forgiveness puzzle. This will help my biz clients account for their PPP more accurately.

[BOB W]

Here is a webinar by MARCUM Accountants and Advisors

https://marketing.transtar1.com/acto...=TV2:UPb97ruNa

[Jiggers]

Is there any "tracing" on what the PPP-SBA funds were used for? The funds go into a client's bank account. Not his normal operating account. He has sufficient funds to pay payroll and expenses. So he uses the PPP-SBA funds in the other account to pay down a loan. Principal only. No interest. Normal business accounting there is no deduction for the loan payment. But he haves loan forgiveness and no expenses to offset it. so he has income.
Am I thinking correct?
Or does it matter what account business account is used to pay business expenses?

[Lion]

It's been taught to me that best practices is to put the PPP funds in a separate bank account, to write checks from that account for items we know to be forgiveable, to have a good paper trail when the time comes to account for the use of funds. I've told my clients that don't want the hassle of changing direct deposit information to transfer funds from the PPP account to their payroll account after each payroll based on the gross income + SUTA.

Keeping the paid expenses separate in the accounting system is primary, but the above is a strong secondary paper trail.

There are some good webinars out there now that forgiveness regulations are starting to dribble out. Check NAEA, NATP, VASEA, Tax Practice Pro, look for Tony Nitti's name on Forbes blogs, David Mellem's e-newsletters. Green & Sklarz, and almost anything in May.

[Uncle Sam]

This whole issue of opening a 2nd bank account to specifically pay for and identify PPP loan approved expenses -- comes out of the idea from TRA 1986 or thereabouts of Interest Expense tracing rules of deductible interest expense.
Instead of creating a double accounting system and creating unnecessary work for a temporary period - why not just take the funds from PPP - put it into an already existing account of the business owner - in which a loan receivable is created for non-self employed entities, or a separate already existing bank account of the Schedule C business owner - then put the funds back in to the business account when paying PPP approved expenses - penny for penny - until all cleared out?

[TaxGuyBill]

Is there any "tracing" on what the PPP-SBA funds were used for?

No. The CARES Act says the amount forgiven is on the costs "incurred and payments made". There is no requirement in the CARES Act that the specific loan money be traced and used for those amounts.


FORGIVENESS.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.

[BOB W]

This whole issue of opening a 2nd bank account to specifically pay for and identify PPP loan approved expenses -- comes out of the idea from TRA 1986 or thereabouts of Interest Expense tracing rules of deductible interest expense.
Instead of creating a double accounting system and creating unnecessary work for a temporary period - why not just take the funds from PPP - put it into an already existing account of the business owner - in which a loan receivable is created for non-self employed entities, or a separate already existing bank account of the Schedule C business owner - then put the funds back in to the business account when paying PPP approved expenses - penny for penny - until all cleared out?

A separate bank account will not satisfy the requirement of how the funds are spent. Full documentation will be required, so a separate account is not needed. An "off books" worksheet seems to be the way to go with details coded for each non-payroll expenditure and then added, the required special payroll report that is generated by your payroll company. (payroll processors are required to provide this report) It will deal with the cost of payroll including gross payroll, state unemployment taxes, health insurance and employer cost of pension expense.

[JON]

Hesse, a local CPA, who heads the AICPA Taxation committee says "the intent was to have the expenses deductible and the PPP loan forgiveness not taxable!! The committee has asked for communications with the IRS to review the Notice? I think IRS saw who were getting the loans and said "WHAT"! More information to come from the IRS as to PPP and what they will examine and how,promised by 5/15/20..