How does gross income affect expenses that can be forgiven under the Payroll Protection Program (PPP)?
Under the Cares Act, a recipient of a covered loan can receive forgiveness on the loan (covered loan forgiveness) in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the covered loan’s origination date:
- Payroll costs
- Payment of interest on any covered mortgage obligation
- Any payment on any covered rent obligation
- Utility payments that are covered
However, the CARES Act provides that the amount of the covered loan forgiveness is reduced if, during the covered period:
- The average number of full-time equivalent employees of the recipient is reduced as compared to the number of full-time employees in a specified base period, or
- The salary or wages of certain employees is reduced by more than 25% as compared to the last full quarter before the covered period.
In addition, no more than 25% of the amount forgiven can be attributable to non-payroll costs.
Is the calculation based on gross income?
Section 1106(i) of the CARES Act addresses certain Federal income tax consequences resulting from covered loan forgiveness. Specifically, that subsection provides that, for purposes of the Code, any amount that (but for that subsection) would be includible in gross income of the recipient by reason of forgiveness described in section 1106(b) “shall be excluded from gross income.”
Thus, section 1106(i) of the CARES Act operates to exclude from the gross income of a recipient any category of income that may arise from covered loan forgiveness, regardless of whether such income would be:
- Properly characterized as income from the discharge of indebtedness under section 61(a)(11) of the Code, or
- Otherwise includible in gross income under section 61 of the Code.
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