Proceeds that are forgiven will generate reduced income tax deductions.
The IRS has just released IRS Notice 2020-32 that informed the public if a taxpayer requests and is approved some or all of the PPPL to be forgiven, then that amount that we used for expenses related to payroll, health care, rent, interest expense and other related qualified costs will not be deductible. This IRS notice is related to Internal Revenue Code Section 265, which stated in summary that expenses related to tax-exempt income are not tax deductible.
Also, consider that GAAP will treat the accounting differently for loan forgiveness. “ASC 405-20 provides accounting guidance relevant to the extinguishment of liabilities. Under ASC 405,when a debtor is legally released from a liability, the debt is considered extinguished via “legal defeasance.” Based on the information available at this time, loan forgiveness under the Paycheck Protection Program appears to fit the characteristics of a legal defeasance and could therefore be accounted for as a debt extinguishment.” Please reach out to us if you have any specific questions. We have attached a link for you to read IRS Notice 2020-32 at https://www.irs.gov/pub/irs-drop/n-20-32.pdf