The Paycheck Protection Program (PPP) was established under the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) to provide financial resources to small and mid-sized businesses. These funds were distributed to help companies cover certain expenses and maintain their payroll during the pandemic.
You may have seen some reports circulating on the topic of loan forgiveness, which may be confusing. Please allow us to provide some clarity.
The CARES Act explicitly states that PPP loan forgiveness doesn’t trigger taxable income. It further states that income arising from the forgiveness of debt “shall be excluded from gross income.”
The IRS issued Notice 2020-32 on April 30, 2020, stating that forgiven PPP loan proceeds used for otherwise allowable business expenses are not deductible.
How does PPP Loan Forgiveness Relate to the R&D Tax Credit?
Under this Notice, taxpayers are unable to claim tax deductions for expenditures that were paid with their PPP funds. Thus, taxpayers cannot claim these expenses for purposes of calculating their R&D tax credit.
What does all this mean to you?
A company that received a PPP loan may experience a reduction in their ability to claim both federal and state R&D tax credits. This could translate into a significant decrease in R&D expenditures, reducing your R&D tax credits for 2020.
You can try and mitigate the impacts by applying the PPP forgivable loan funds to
- Non-payroll costs (up to 40% of the PPP loan funds)
- Employees that do not perform qualified research activities.
By doing this, borrowers could preserve the wages paid to employees involved in qualified research activities as deductible, thus mitigating the impact of the forgiven PPP loan funds on their R&D credit.
Lawmakers have expressed disagreement with the IRS’ interpretation in a letter to Treasury Secretary Steven Mnuchin. The IRS may change its position but until further guidance is issued, we ask that you closely monitor your PPP expenditures.
If you want to have a conversation about this, please let us know. We will be happy to take a deeper dive into how this will impact you.
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