Division A, Title IV, Subtitle B, of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorizes the Department of the Treasury (Treasury Department) to provide payments to passenger air carriers, cargo air carriers, and certain contractors that 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 Program Agreement provides that unless otherwise provided in guidance issued by the Treasury Department or the Internal Revenue Service, “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 Internal Revenue Code of 1986 (for example, a Taxpayer Protection Instrument in the form of a note will be treated as indebtedness for purposes of the Internal Revenue Code of 1986).” Additional non-Federal income tax information on the Treasury Department’s Payroll Support program for air carriers and contractors is available at The CARES Act Preserves Jobs for American Industry webpage. Q. If a Recipient does not issue Taxpayer Protection Instruments to the Treasury Department in exchange for Payroll Support, is the receipt of the Payroll Support taxable to the Recipient under the Internal Revenue Code (Code)? A. Yes. If the Recipient does not provide Taxpayer Protection Instruments to the Treasury Department as compensation for the Payroll Support, the receipt of the Payroll Support is not excluded from the Recipient’s gross income under the Code and therefore is taxable. Q. When a Recipient that does not issue any Taxpayer Protection Instruments uses the Payroll Support to pay wages, salaries, and benefits to its employees as required under the Payroll Support Program, are all of those expenses deductible under the Code? A. Yes. The Code generally permits the payment of wages, salaries, and benefits to employees to be deducted as ordinary and necessary business expenses. Q. If a Recipient issues to the Treasury Department any warrants, options, preferred stock, debt securities, or notes (or a combination of these Taxpayer Protection Instruments) as compensation for the Payroll Support, is the receipt of the Payroll Support taxable under the Code? 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 warrants, options, or preferred stock, plus the issue prices of any debt securities or notes issued, is taxable to the Recipient under the Code. The remaining Payroll Support is not taxable to the Recipient under the Code. 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 under the Code? A. Yes. The Code generally permits the payment of wages, salaries, and benefits to employees to be deducted as ordinary and necessary business expenses, regardless of whether the Recipient issues Taxpayer Protection Instruments.
