Paycheck Protection Program (PPP) Loans have become an important topic for businesses looking to receive relief during the trying times of 2020. With this loan there is also the forgiveness and the impacts it can have on your tax return to consider. Language written into the CARES Act prevents any loan amounts forgiven from becoming income for the taxpayer. For businesses that were able to secure these loans there is an important thing to consider if you are also claiming the Research & Development (R&D) Tax Credit for the 2020 tax year. The IRS issued Notice 2020-32 on April 30, 2020 stating that any loan proceeds forgiven will no longer be deductible on the taxpayer’s tax return for tax year 2020. This notice has a direct impact on the amount of expenses that taxpayers can claim as qualified research expenses (QREs) for purposes of the R&D Tax Credit. This will potentially have a negative impact on both the federal and state R&D Tax Credit.
To receive loan forgiveness there are certain criteria to follow such as: as long as a business maintains adequate staffing and payroll records, the amount forgiven will be equal to its payroll, rent, utilities and mortgage interest paid over a twenty-four-week period. If a business received the PPP loan before June 5, 2020 it may elect to use the original eight-week covered period. Regardless of whichever period is used, to be forgivable 60 percent of the loan proceeds have to be spent on payroll. How a company chooses to allocate the proceeds they plan to have forgiven can potentially impact the amount of R&D Tax Credit available. Any proceeds forgiven that have been allocated to paying employees who perform R&D activities will have to be excluded from the R&D tax credit calculation. This can result in a decrease in the amount of credit available to the taxpayer.
In a letter written to Treasury Secretary Steve Mnuchin, lawmakers expressed concerns that IRS Notice 2020-32 reverses the benefit granted by Congress exempting PPP loan forgiveness amounts from taxpayer income. This indicates that there may be a change to this determination of the deductibility of these forgiven expenses, but this remains to be seen. DST Advisory Group will continue to follow this situation to provide you the most up to date information on PPP Loan Forgiveness and the R&D Tax Credit.