Non-Deductibility of PPP Related Expenses to the Extent of Forgiven PPP Funds (IRS Notice 2020-32)

Janet Kim, CPA, MST

Wright Ford Young & Co., CPAs

 

The IRS released Notice 2020-32 on April 30, 2020, which provides guidance on the deductibility of expenses paid with Paycheck Protection Program (PPP) loan proceeds that are forgiven and excluded from the borrower’s income. The IRS has determined otherwise deductible expenses that are paid with PPP funds may not be deductible for federal income tax purposes to the extent the expenses were reimbursed by a PPP loan that was then forgiven.

The PPP was created by Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Under the PPP, the borrower can receive forgiveness of indebtedness in the 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, mortgage interest, rent, and utilities during the COVID-19 crisis. The forgiven amount is excluded from gross income under the PPP. The IRS notice explains that to the extent that Sec 1106 excludes from gross income the amount of a covered loan forgiven, this results in a “class of exempt income” under Sec. 265 which disallows otherwise allowable deduction for the amount of covered loan forgiveness because such payment is allowable to tax-exempt income. This treatment prevents a double tax benefit.

The CARES Act did not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses paid by the PPP borrowers are allowable if the covered loan is subsequently forgiven as a result of the payment of those expenses. According to Senate Finance Committee Chairman Chuck Grassley “the intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible, this notice is contrary to that intent.” It may take clarification in a future bill if the original intent of Congress is that these expenses remain tax deductible.

We continue to monitor all newly issued legislation and guidance to assist you in making informed decisions.  If you have any questions or concerns regarding this latest guidance, please contact your WFY advisor or contact us here.