Does the PPP or Payroll Protection Plan Loan Lower 2019 R&D Tax Credits?

Does the PPP or Payroll Protection Plan Loan Lower 2019 R&D Tax Credits?

Posted by Jeffrey Feingold on 08.14.20

IRS Notice 2020-32 requires taxpayers who borrow under the PPP or Payroll Protection Plan loan program, who then subsequently receive loan forgiveness, exclude the forgiven amount from their tax deductions.  Since most of the borrowed PPP funds were used for payroll - some taxpayers used the funds exclusively for payroll protection purposes - the Notice raises the question:  could the loan forgiveness amounts lower a taxpayer's R&D tax credit claim?  The answer is unclear.  It's a logical conclusion to reach that reducing payroll expense may result in reduced QRE's or Qualified Research Expenditures for purposes of the R&D credit calculation.  For most taxpayers, R&D tax credit expenses consist primarily (and for many taxpayers, the Qualified Research Expenses consist entirely) of payroll expenses.  If these payroll expenses are disallowed per IRS Notice 2020-32, the R&D tax credit calculation would be reduced.  Under the Section of the tax code that the IRS relied on in Notice 2020-32, loan forgiveness amounts are disallowed, and TPA assumes that the IRS will take the position that such expenses are to be excluded as deductions for any tax purposes including credits.  There is, however, a bi-partisan legislative effort presently underway to reverse this negative aspect of Notice 2020-32, as the intent of the framers of the PPP legislation was not to  compel taxpayers to reduce their tax deductions by the amount their PPP loans are subsequently forgiven.  Tax Point Advisors will continue to monitor this issue closely and will alert our CPA partners as soon as this unintended negative tax consequence of Notice 2020-32 is rectified.  


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