On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act, enacting it into law. The bill had been passed overwhelmingly, in a bipartisan manner, by both the House and Senate, as legislators struggled to take action to show that they were responding to the erupting novel Coronavirus COVID-19 pandemic. In typical legislative fashion, the bill’s title was creatively designed to give a meaningful acronym, indicating what the legislature wanted their constituents to know that they had accomplished. Thereafter, the new law was known by this acronym – the CARES Act, which will be referred to as the “Act” from this point forward in this manuscript.

The total cost of the massive 880-page Act was estimated at $2.3 trillion. The reader should keep in mind that this Act is the most expensive single piece of legislation in U.S. history – more than the Affordable Care Act of 2010, more than the Tax Reform Act of 1986, and more than the recent signature tax accomplishment of the Trump Administration – the Tax Cuts and Jobs Act of 2017. Given the nature and extent of the economic crisis impacting the United States, neither political party resisted the tremendous total cost.

The Act was the third major COVID-19 response legislation. The first was the Coronavirus Preparedness and Response Supplemental Appropriations Act signed into law on March 6, 2020. This law provided an additional $8.3 billion of funding to HHS and SBA to begin to respond to COVID-19. The second was the Families First Coronavirus Response Act, enacted on March 18, 2020. This Families First Act created tax credits to keep employees on their employer’s payroll who could not work because they were infected by the COVID-19, they were caring for others in their household who were infected, or they were unable to work because of restrictions on child care.

A key provision of the Act was a form of indirect unemployment benefit through employers, by providing funding to certain qualifying employers to allow them to keep their personnel employed and paid. This was true even if there was not work for the employees to do, either because of reduced economic demand or because the business was forced to temporarily close or reduce activity for viral safety reasons. The provision was called Paycheck Protection Program, henceforth known as PPP loans, and was funded for $349 billion. The program was administered by the Small Business Administration (“SBA”) as Section 7(a) loans.

While a loan might be a temporary relief measure for businesses, the loans were novel in that there was a wrinkle in the concept – the loans could be completely forgiven if certain requirements were met. In other words, it was a “loan” in name, formality, and administration only, as few (if any) businesses had any intention of repaying the proceeds from the program. Instead, it was really a grant to businesses who qualified, administered by the SBA Section 7(a) loan program. As expected, the program was immensely popular, and the entire $349 billion was claimed in under two weeks.

Basic Requirements. The basic requirements of the PPP loans were –

  1. PPP loans were provided to businesses and organizations with under 500 employees.
  2. The loan was limited to the lesser of $10 million, or 2.5 times the average monthly payroll, not considering pay above $100,000 annually for any employee. The payroll amount was later clarified by the SBA to be 2.5 months of 2019 compensation paid.
  3. The application period was open until June 30, 2020 (later changed in the PPP Flexibility Act – the PPPFA).
  4. The loan proceeds must be used in the period of February 15, 2020, to June 30, 2020, for payroll, mortgage interest, rents on personal or real property, or utilities. Payroll meant cash wages up to $100,000 per employee annual pace, plus employer-paid health insurance and retirement benefits. Mortgage interest was on debts in place before February 15, 2020. Many lenders advised their borrowers to place the loan proceeds in a separate cash account, to demonstrate that the funds were used for qualifying purposes.
  5. Loan repayment was deferred for at least 6 months but not longer than 12 months. Deferred includes principal and interest. The principal not forgiven is repaid at interest of up to 4% and for a period of up to 2 years (later changed in the PPPFA).

For example, a business with 80 employees applies for a PPP loan on May 1, 2020. The business had $1.2 million of eligible payroll in 2019 – an average of $100,000 per month. This business is entitled to a PPP loan of $250,000.

For CPAs, late March transformed from a time that is running on full capacity and completely focused on the last few weeks of tax season, to one that was consumed by consulting with businesses on the various questions of the PPP loan regime, qualifications, determination of the maximum loan amount, the application process, how it worked for various different legal types of entities, etc. The loans were processed by local banks and guaranteed by the SBA. Many businesses had to find a new provider of these SBA lending services, as they did not previously have or need a local lender who processed SBA loans, or because they banked with a major institution which was prioritizing larger customers. The focus on PPP matters continued to preoccupy CPAs throughout the summer as the program developed, technical guidance continued to evolve, legislative changes were made to the PPP regime, clients sought advice as to how to maximize forgiveness, and the rules and procedures of forgiveness were clarified.

Loan Forgiveness. As stated earlier, the popularity of PPP loans was found in the fact that the loans were forgivable. Thus, few of the loan applicants had any intention of truly applying for a loan they would need to repay. The amount eligible to be forgiven was the amount spent on compensation (up to $100,000 annual pace), mortgage interest, rents, and utilities in the covered period (later expanded in the PPPFA). The covered period was defined as the 8 weeks beginning with the date of the receipt of the loan proceeds. Full forgiveness also required that no single employee suffered a pay cut of more than 25% and that the employer did not reduce the number of full-time equivalents (“FTE”s) during the period of February 15, 2020, to June 30, 2020.

One confusing detail of forgiveness was that the CARES Act provided that the expense must be “paid or incurred” during the covered period. There was considerable concern about this “loose” language using technical accounting terms, and many advisors did not know exactly what this particular application meant. Through regulations, the SBA later clarified that the rule means (1) the amount of qualifying expenses paid during the covered period (even if the expense was incurred before the covered period began), and (2) the amount of qualifying expenses that are incurred during the covered period, and paid at the next regular due date after the covered period. This appears to be a generous interpretation of this requirement.

The reader should note a key issue in the mathematics of the PPP forgiveness, as designed. The loan amount was based on 2.5 months of 2019 of payroll, which is about 11 weeks. To be eligible for full loan forgiveness, this 11-week amount must be spent in the 8-week covered period (later changed by the PPPFA). Thus, it is not mathematically possible to receive full forgiveness unless the borrower (1) increased payroll costs by hiring, paying bonuses, or accelerating payroll into the covered period, or (2) focused also on the non-payroll qualifying uses of the funds. While the loan was based purely on payroll, it could also be spent on non-payroll items.

Other Employment Tax Relief in the CARES Act. It is important to note that the CARES Act also allowed employers to defer payment of the employer share of FICA tax incurred between March 27, 2020, and December 31, 2020. The subject of this deferral is the half of the FICA tax that is paid by the employer, not the half that is withheld from the employee. This deferred tax is to be remitted to the government in the form of 50% due on December 31, 2021, and the other 50% on December 31, 2022. Note that unlike the PPP loan regime, there is only one test to meet to qualify for this tax benefit – any business that did not receive a PPP loan is eligible for this deferral. Note that the PPPFA removed this one rule, so now any business can employ this deferral strategy.

Note also that many CPAs are concerned that businesses in serious financial difficulty may choose to use this provision to defer employer payroll taxes unnecessarily, and the business will find itself facing a large liability on December 30, 2021, or 2022, without the funds to make these payments.

Forgiveness Procedure. Forgiveness is granted by completing the application form SBA 3508 or SBA 3508EZ, attaching all of the requirement documentation, and submitting it to the local originating lender. The lender will review the documentation and grant preliminary approval, and then submit the documentation to the SBA for a second review. If approved by the SBA, the SBA will remit payment of the forgiven part of the loan to the local lender. Any balance is then subject to regular payments by the borrower. The PPPFA provides that the forgiveness application is timely if submitted within ten months of the end of the covered period.


Compensation Percentage Test. Shortly after the PPP regime began, it was announced that at least 75% of the loan forgiveness must be used for payroll. The reader should note that this 75% requirement was an administrative rule only, and was not a requirement in the CARES Act itself. Also, the requirement was not a “cliff test”, meaning that no forgiveness was available if the 75% test was not passed. Instead, it only limited the maximum amount of forgiveness to the amount of compensation, divided by 75%.

This percentage requirement was later reduced to 60% in the PPPFA.

For example, consider the case of a $100,000 PPP loan. The business spends $70,000 on payroll and related items, and $30,000 on rent and utilities. Total payroll of $70,000 divided by 75% results in maximum forgiveness of $93,333. In these facts, $6,667 of the loan must be repaid. Note that this example employs the old standard of 75% payroll usage. Under the new standard of 60% payroll usage, all of the loan is eligible for forgiveness.

Audit the Spending. Soon after the PPP regime caught national attention, concerns were raised about whether the proceeds would be properly spent by some applicants. The Treasury Secretary responded by announcing that loans of $2 million or more would be “audited”. At the time of this writing, borrowers still do not know what this audit involves. It could be just an audit of properly spending the proceeds, it could be an audit of the forgiveness application or some other standard. Further, who will perform these audits – a CPA, the bank, the SBA, the Treasury Department, the Internal Revenue Service, or some other party? The rules and standards under this announcement remain elusive.

Paycheck Protection Program and Health Care Enhancement Act. Enacted on April 24, 2020, this law was the fourth major Coronavirus Act. The PPP funding was already exhausted by this point, so this law increased funding for the popular program by another $310 billion.

Paycheck Protection Program Flexibility Act (“PPPFA”). Enacted on June 5, 2020, this law made several changes to the program as the end of the 8-week covered period was approaching for most borrowers, and many borrowers were deeply anxious about how their forgiveness was developing. Changes in the PPPFA included –

  1. Changed the covered period from 8 weeks to 24 weeks but not beyond December 31, 2020. The additional 16 weeks greatly simplified the effort to get full forgiveness. However, the borrower can elect to continue to employ the prior 8-week standard and related tests. This determination of the 8-week or 24-week forgiveness is done at the time of the forgiveness application.
  2. Reduced the payroll requirement from 75% to 60%, but the pressure in the area was already largely alleviated by the extension of the covered period from 8 to 24 weeks. The reader should note that the 75% spending requirement was not in the CARES Act itself, but was a regulatory response to concerns about how the money was being spent. It is interesting that the percentage was not changed by similar regulatory action, but was changed by the enactment of law. It would seem that this change could have been done short of Congressional action.
  3. Moved the FTE test measurement date from June 30, 2020, to December 31, 2020. This was a major help to the hospitality industry which was generally limited in their ability to fully reopen by June 30 and return to full employment.
  4. Extended the repayment period for unforgiven loans from two to five years, but only for loans made after June 5, 2020, to avoid having to re-document prior loans. The law provided that older loans can be changed from two to five years if the borrower and lender agree.
  5. Provided relief from the FTE test for businesses who can document (a) an inability to rehire individuals who were employees on February 15, 2020, or (b) an inability to hire similar qualified individuals for unfilled positions before December 31, 2020.
  6. Removed the CARES Act prohibition that did not allow PPP recipients to defer their employer payroll tax.

Technical analysis of the PPPFA caused many analysts to pause because it appeared that the new 60% test, as worded in the law, was now a “cliff test”, not a pro-rata test. Thus, failure to meet the 60% spending test would void any forgiveness, instead of just limiting the maximum forgiveness. This law began in the House, and Senate passage was delayed due to concerns about whether this spending limit was now a “cliff test”. On June 8, 2020, the Treasury Department and the SBA said that they would not administer this as a “cliff test”, thus effectively ending this concern.

In the author’s opinion, this demonstrated a very inconsistent application of Treasury rules. There have been many rules that were passed into law with unintended consequences, such as the failure in the Tax Cuts and Jobs Act of 2017 to properly implement qualified improvement property depreciation relief. In that case, it was clear to all concerned what the legislators had intended to do, despite the law’s failure to do so as enacted, yet the Treasury Department announced that it could not implement the rule as intended. So, this application of the “cliff test” in the PPPFA does not follow regulatory precedent.

PPP Extension Act. This law was signed by the President on July 4, 2020. At the time, there was still $129 billion available after the second round of PPP funding, but loan applications ceased on June 30 as provided under the CARES Act. This legislation added about five weeks to the PPP application deadline, making the new application cut-off August 8, 2020.

Note that several dates and periods are now in conflict after the passage of the PPP Extension Act.  The PPPFA requires that the PPP forgiveness is for amounts spent in the 24-week covered period, but also by December 31, 2020. A study of the calendar shows that to spend the funds within 24 weeks but also by December 31, 2020, one must start the covered period by July 16, 2020, to have the full covered period available. Beginning the covered period after that date will limit the covered period to something less than 24 weeks, so that it can end by December 31, 2020.


First, note that Section 1106(i) of the CARES Act provides that the forgiveness “shall be excluded from gross income.” In common parlance, this was interpreted to mean that the PPP forgiveness process would not increase the borrower’s taxable income. However, the law was passed very quickly and perhaps without adequate due diligence of its language. Soon after passage, there was much discussion of whether the fact that the forgiveness was excluded from income could mean, by extension, that the expenses paid with PPP forgiveness were not affected by that provision. The treatment of the items paid with PPP funds (hereafter referred to as “PPP expense”) was not addressed in the CARES Act or any subsequent PPP legislation.

Deduction of PPP Expenses. On May 1, 2020, the Internal Revenue Service announced in Revenue Notice 2020-32 that PPP expenses may not be deducted, under the determination that they were the equivalent of the costs of generation of tax-free income. Some tax experts said that this was the correct technical response. However, many others, including this author, would argue that if this is the result that Congress intended, then they would have just said that PPP forgiveness is taxable income and left the expense alone. But Congress was intentional in instead stipulating that the forgiveness is excluded from income. If fact, many legislators including Senate Finance Committee Chair Charles Grassley commented after the release of the IRS Notice that this interpretation is contrary to Congressional intent. Any CPA can demonstrate that to make the forgiveness tax free, but lose deductions for the PPP expenses, is effectively the same as making the forgiveness taxable.

Congress responded by introducing Senate Bill 3612, the “Small Business Expense Protection Act of 2020”. The bill would add a new clause to Section 1106 of the CARES Act reading “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by [loan forgiveness]”. As of this writing, this bill is still locked up in committee.

Press reports indicate that the Senate sponsors of Senate Bill 3612 are negotiating with the IRS to retract Notice 2020-32.

The consequences of the fate of PPP expenses cannot be overstated. If the deductions are lost, then indirectly there is a federal tax of about 21% to 35% on the PPP loan forgiven, greatly reducing its economic effectiveness. Further, many of these businesses are suffering economically already, and have completely spent the funds at this point, leaving no provision for the income tax effect.

If, on the other hand, the PPP expenses are deductible, then the benefit of the PPP program is magnified by (1) providing tax-free funds as provided in the CARES Act language, and (2) allowing a deduction for the wages, rent, interest, and utilities that the funds were spent on.

Basis Increase. As noted in the prior section, Senate Bill 3612 provides that “… no basis increase shall be denied…” as a result of PPP forgiveness. Many family businesses are facing tax losses in 2020, or are carrying forward losses from prior years into 2020, that are suspended because the owners lack sufficient tax basis to deduct those losses. If the forgiven PPP proceeds would increase basis as provided in Senate Bill 3612, then that is a third benefit of the PPP regime. It could allow losses to be deducted which would provide a further tax benefit in 2020, or perhaps even a net operating loss that can be carried back to 2015. Note that a tax benefit under the CARES Act provides a temporary relief where net operating losses from 2018, 2019, and 2020 can be carried back for five years and further tax refunds could be unlocked. Under current law, this is a temporary relief provision, and after 2020, the ability to carry back a net operating loss is no longer available.

Triggering Event. If the IRS position in Notice 2020-32 stands, whereby PPP expenses are not deductible, then a serious issue will be centered around the triggering event of forgiveness. Remember that the PPP regime is, at its core, a loan program. The loan can be forgiven only if the borrower actually applies for forgiveness. It seems slightly beyond the intent of the program, but PPP loans can be repaid instead of seeking forgiveness. Further, the borrower must meet all of the tests, and forgiveness is granted after a review and approval of the submitted application and documentation. If the PPP expenses turn out to indeed be not deductible, when does this happen? Would it be a non-deductible expense in the 2020 tax year when the funds were spent? Or would it be a non-deductible expense in the 2021 tax year when the loan is forgiven? The author would argue that no expenses are non-deductible until forgiveness is actually approved, but the Treasury Department will have to issue regulations to clarify this question, assuming that Senate Bill 3612 is not enacted.

Further, under the PPPFA, the final FTE testing is not done until December 31, 2020. Thus, it would logically seem that 24-week forgiveness applicants cannot submit a complete application until the year 2021. Then by extension, the forgiveness cannot be granted until 2021. It would seem that any loss of deductions would not impact the business’ income tax return until 2021. But, again, regulations are needed in this area to clarify such matters.

How Does This Impact Fiscal Years? What position does a business take, with a fiscal year-end of 6/30/2020 or 9/30/2020 (for example), as to their income tax filings? Do they decide that they must follow current IRS guidance in Notice 2020-32? Or do they extend their tax filings until the disposition of PPP expenses is clarified? What if the forgiveness is granted after their year-end – can they conclude that this is a problem for the future? At this point, the extension seems the prudent action, while preparing for the worst result of the loss of PPP expenses.

Effect on 2020 Tax Projections. Some taxpayers may expect that 2020 will be an off-year for profitability, and consequently they may expect less of an income tax liability. However, the specter of the loss of PPP expenses could create an increased tax liability in a down profitability year. Taxpayers would be wise to project that possible impact as part of their year-end tax planning if we do not have a clear answer as to the deductibility of PPP expenses at that time.

Advantages for Proprietorships and Partnerships? According to the IRS’s position in Notice 2020-32, expenses that are paid with PPP funds are not deductible. Consider the situation with compensatory payments to owners. An “S” corporation would pay deductible compensation to the owner, and under Notice 2020-32, if upheld, the deduction for owner compensation would be reduced.

Contrast this result with that of the proprietorship or partnership (or LLC taxed as a partnership). Here, PPP funds can be used to pay compensation-equivalents to the owners. However, in a proprietorship or partnership, the payments to the owner are generally not tax-deductible as a fundamental rule. Therefore, if one uses PPP funds to pay a non-tax-deductible expense, is there are a PPP deduction to lose at all?

This basic disparity in terms of how the PPP expense disallowance is handled for various types of entities will need to be addressed in regulations before income tax returns can be prepared for periods of PPP forgiveness.

Can PPP Forgiveness Affect 2019 Returns Already Filed? Remember that an eligible expense of PPP funds, under the compensation part of the formula included employer-funded retirement. Consider the situation of a 2019 calendar year income tax return, filed on July 15, 2020, that included a deduction for employer retirement that was actually paid in the PPP covered period in May 2020. If that deduction is lost under PPP expense disallowance, for what period is the deduction disallowed? An argument can be made that the PPP funds were used to pay an expense in 2020 that was deducted in 2019. Further guidance will be needed to tell us whether this is a problem with our 2019 tax returns already filed.

What About the States? For each state that a business files a tax return, the CPA will need to know how PPP forgiveness is treated in that state. For NC, House Bill 1080 was signed by the Governor on June 30, 2020, which provides that PPP expenses are not deductible for NC state tax purposes, even if the federal government later determines that they are deductible for federal tax purposes.

Thus, even if the problem of PPP expenses is later resolved in a beneficial way for federal income taxes, perhaps through the passage of Senate Bill 3612, a state tax obligation will be incurred nevertheless.


Deduction of PPP Expenses. As discussed extensively above, Senate Bill 3612 would make several changes, including allowing basis for PPP receipts, and clarifying that PPP expenses are deductible. This bill has 31 Senate sponsors, representing both parties. The Bill was introduced on May 5 but has not made further progress as of this writing, despite bipartisan support.

Small Loan Forgiveness. Senate Bill 4117, “The Paycheck Protection Small Business Forgiveness Act”, would change the forgiveness application process for loans under $150,000 to a simple, one-page document, where the debtor basically attests that they have met all requirements for forgiveness. Of all PPP loans made, it is reported that 86% of loans were under $150,000. This Bill has 28 Senate sponsors, mostly Republican. This Bill was introduced on June 30 but no progress is noted as of this writing.


Much work remains before we know the full impact of the PPP regime on 2020 and 2021 economics and tax filings. Taxpayers would be well-advised, whether in filing their tax returns or applying for PPP forgiveness, to delay their decisions until the last possible moment. This is still a rapidly evolving environment, and advisors must be adept to stay abreast of the latest changes.


  • CARES – The Coronavirus Aid, Relief, and Economic Security Act enacted March 27, 2020
  • PPP – Paycheck Protection Program
  • SBA – Small Business Administration
  • PPPFA – Paycheck Protection Program Flexibility Act
  • FTE – Full-time equivalent
R. Milton Howell III, CPA, CSEP
R. Milton Howell III, CPA, CSEP

Milton is experienced in taxation issues including, tax research for both open and closed transactions, structuring complex tax transactions, estate and income tax planning, and representing clients before tax authorities. As DMJ’s Director of Tax Services, Milton regularly writes and reviews articles in local, regional, and national publications on tax matters and spends significant time monitoring current tax issues and legislation.

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