The CARES Act
The CARES act provides that PPP loan forgiveness does not trigger taxable income. However, on April 30, 2020, the IRS issued Notice 2020-32, asserting that forgiven PPP loan proceeds used for otherwise allowable business expenses are not deductible on the 2020 tax return. The practical effect of expense disallowance is an increase in taxable income, such that borrowers are still essentially required to pay tax on the loan forgiveness amount. There is a chance that the IRS’s position may not stand given that it is contradictory to congressional intent, but for now this is the rule.
Thankfully, the rules for the R&D credit have not changed. There is nothing currently in the code that indicates that if the taxpayer cannot claim these deductions then they will not be available for purposes of calculating the R&D tax credit. In fact, many accrual-based tax returns contain nondeductible wages every year, and these M-1 adjustments are not considered in the calculation of the R&D Credit.
In calculating an R&D Credit, Box 1 wages from the W-2 are used as a starting point, per Code Section 41. Therefore, CTA does not expect an effect on R&D expenditures or a decrease in R&D tax credits for the 2020 tax year as a result of PPP loan forgiveness.
Until we receive further guidance, we advise companies to closely track and monitor how they are spending their PPP funds. When applying for loan forgiveness, it is important to consult your regular Tax Advisor.