On April 30, 2020, the IRS provided guidance with respect to the deductibility of certain otherwise deductible expenses incurred by a taxpayer that received a covered loan under the PPP.
Under the PPP program, a borrower of a covered loan that uses the loan proceeds to pay expenses such as payroll, benefits, rent, utilities and interest may have some or all of the loan forgiven. The CARES act then provides that the forgiven amounts of the loan are not be included in the borrower’s taxable income.
In the notice the IRS takes the position that no deduction is allowed for an expense if the payment of the expense results in forgiveness of a covered loan where income forgiveness that is excluded from gross income under the CARES Act. This IRS interpretation is open to question and Congress may clarify this matter.
The U.S. Federal Reserve Bank released yesterday a revised set of “frequently asked questions” (FAQs) concerning the “Main Street” lending program that was established by funds appropriated by the CARES Act.
Among other requirements of the program, a borrower is required to agree to and certify that for a period of 12 months from the date the loan is no longer outstanding, (i) not to buy back any equity securities of the borrower or any parent company that are listed on any national securities exchange (other than to the extent required under a contractual obligation in effect prior to the enactment of the CARES Act) or (ii) pay any dividend or make other capital distribution. Prior to release of the FAQs yesterday it was unclear whether tax distributions by pass-through entities are to be considered a “dividend or other distribution” and thus not allowed.
The FAQ clarified that the restrictions on distributions of dividends and other capital distributions do not apply to distributions made by a partnership, an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect to the entity’s earnings.
Please do not hesitate to contact Sharon Shachar or any of our tax attorneys with any questions in connection with this alert.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Author Sharon Shachar is a partner in the tax practice group at Klehr Harrison.