Paycheck Protection Program Update; Audits and Tax Deductions for Wages

Recently, the Treasury Department and the Internal Revenue Service (IRS) made some announcements affecting Paycheck Protection Program (PPP) borrowers. Specifically, the Treasury Department has released new guidance on PPP loan audits, and the IRS has released new guidance that affect tax deductions for PPP borrowers.

Will your PPP loan be audited?

The federal government is now turning its attention to ensuring that PPP loans went to the intended targets. Treasury Secretary Steven Mnuchin stated that the federal government intends to audit all PPP loans exceeding $2 million.

One of the purposes of these audits is to determine whether those borrowers should have actually received a PPP loan. Borrowers who received over $2 million may need to take a second look at the reason(s) they applied for the loan.

The federal government might request documentation that a certain percentage of your employees would have been laid off but for the loan. Some business owners may have applied for the loan to offset anticipated delinquent customer payments or cancelled product. In that case, a borrower expected to be short on revenue to cover their own operating costs as a reason for applying for the loan.

However, the program was intended to keep money in the pockets of employees, so 75% of loan expenses should be applied to payroll. Other expenses, such as operating costs, are only allowed for up to 25% of the loan amount.

While it seems as though the government is currently focused on larger borrowers, it is also possible that smaller borrowers (less than $2 million) could face an audit. 

How can your business prepare for an audit of your PPP loan?

There is no clear guidance on how to prepare for a PPP loan audit. At a minimum, borrowers should be properly documenting why they needed the PPP loan, and that they are spending it properly in order to maximize forgiveness. Pay close attention to clearly documenting your business’ payroll history, as well as operating expenses paid with the loan. If your SBA lender required such documentation in your application process, then calculating forgivable amounts should already be part of an established system.

Are wages still tax deductible if paid from the PPP loan?

The IRS has also released some guidance affecting the tax deductions for PPP borrowers. The PPP loan is a forgivable debt, but unlike most forgiven debts, the debt forgiven through the PPP is not treated as taxable income for the borrower.

As a result, the IRS will not be granting deductions for wages that were paid from PPP loan funds. The rationale given by the IRS is that non-taxable forgiveness and a tax deduction acts as a double tax benefit to borrowers.

Questions about your PPP loan?

Contact the business lawyers at Murphy Desmond S.C. if you have questions about your PPP loan, the possibility of being audited, forgivable expenses, and other business loan issues. We have offices in Madison, Janesville, Appleton, and Dodgeville, Wisconsin. Contact us by calling 608.257.7181 or email us at email@murphydesmond.com.

Published May 5, 2020

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