The IRS has answered some frequently asked questions on tax aspects of the payroll support program for air carriers and contractors authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136).
Background.
The CARES Act authorizes the Treasury Department to provide payments to passenger air carriers, cargo air carriers, and certain contractors. Those payments must be exclusively used for the continuation of payment of employee wages, salaries, and benefits (Payroll Support).
Section 4117 of the CARES Act provides that the Treasury Department may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by a company receiving Payroll Support (Recipient) to provide appropriate compensation to the Federal government for the provision of the financial assistance (Taxpayer Protection Instruments).
The Payroll Support Agreement (i.e., the agreement between the Recipient and the Treasury Department that sets out the terms of the Payroll Support program) provides that unless otherwise provided in guidance issued by the Treasury Department or the IRS, “the form of any Taxpayer Protection Instrument held by the Treasury Department and any subsequent holder will be treated as such form for purposes of the 1986 Code (for example, a Taxpayer Protection Instrument in the form of a note will be treated as indebtedness for purposes of the 1986 Code).”
Answers to frequently asked questions on payroll support program.
Q. Is the receipt of Payroll Support taxable to the Recipient if the Recipient does not issue Taxpayer Protection Instruments to the Treasury Department in exchange for Payroll Support?
A. Yes. The receipt of Payroll Support is taxable if the Recipient does not issue Taxpayer Protection Instruments to the Treasury Department.
Q. When a Recipient that does not issue any Taxpayer Protection Instruments uses Payroll Support to pay wages, salaries, and benefits to its employees, are all of those expenses deductible?
A. Yes, the payment of wages, salaries, and benefits to employees may be deducted as ordinary and necessary business expenses.
Q. Is the receipt of Payroll Support taxable if a Recipient issues Taxpayer Protection Instruments to the Treasury Department?
A. Part of the Payroll Support received is taxable and part of the Payroll Support received is not taxable. Payroll Support in excess of the fair market value of the Taxpayer Protection Instruments is taxable to the Recipient. The remaining Payroll Support is not taxable to the Recipient.
Q. When a Recipient that issues Taxpayer Protection Instruments to the Treasury Department uses the Payroll Support to pay wages, salaries, and benefits to its employees as required, are all of these expenses deductible?
A. Yes, the payment of wages, salaries, and benefits to employees may be deducted as ordinary and necessary business expenses, regardless of whether the Recipient issues Taxpayer Protection Instruments.
To continue your research on deducting wages and compensation paid for personal services, see FTC 2d/FIN ¶H-3600.
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