Shifting Sands

Here’s a briefing for non-tax professionals on how recent changes in regulations impact the financial health of companies. BY NICHOLAS SANCHEZ

WHEN THE TAX CUTS AND Jobs Act (TCJA) was enacted in 2017, it ushered in the most sweeping tax-law changes since the Internal Revenue Code was overhauled in 1986. To a tax practitioner like myself, it appeared to be a once-in-a-career sea change. Yet, tax laws remain constantly in flux.

Take the CARES Act, for example. More formally known as the Coronavirus Aid, Relief, and Economic Security Act of 2020, it introduced many new tax provisions in an effort to soften the blow of the COVID-19 pandemic.

Even if you are a non-tax professional – working outside of your company’s tax office – it pays to have a basic understanding of some notable changes of late in order to understand their implications for your company.

Let’s take a look at just a few of the important new developments to be aware of.

PPP PECULIARITIES

The CARES Act created the Paycheck Protection Program (PPP), which needs little introduction. PPP loan proceeds may be used to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt. To the extent that the loans are used for these specific allowable expenses over the “covered period” of the loan (either the eight-week or 24-week period after loan origination), PPP loans may be forgiven. This forgiveness, which would otherwise result in cancellation of indebtedness income, is excluded from gross income under provisions of the CARES Act.

However, many people question whether these expenses are still deductible.

The answer to that question came on April 30, 2020, when the IRS issued Notice 2020-32. It clarifies that no deduction is allowed for an expense paid with PPP loan proceeds that are forgiven.

For example, if a borrower uses PPP loan proceeds to pay wages to employees during the covered period, and the loan is subsequently forgiven and excluded from income, those wages may not be deducted on the borrower’s tax return as a business expense.

This still holds true for wages that would otherwise be an ordinary and necessary expense, and therefore deductible. The disallowance of the deduction does not result in income to the borrower, but it limits the benefit of the forgiveness.

Many tax professionals had assumed this would be the case, but the IRS’s guidance was nonetheless a disappointment. While the agency’s position is consistent with certain tax law principles, the denial of a deduction is logically contrary to the intended purpose of the PPP loan program. Many, including the American Institute of CPAs, have advocated for a legislative fix.

While Congress is aware of this issue, and certain proposals have been introduced, no relief is currently available. Consequently, this important issue needs to be monitored. For those involved in tax planning, or those reporting to their organization’s tax department, expenses paid with forgiven PPP loan proceeds should be segregated.

PAYROLL TAX DEFERRALS

On Aug. 8, 2020, President Donald Trump issued a “Memorandum on Deferring Payroll Tax Obligations in