IRS Denies Tax Deduction for Expenses Paid with Forgiven Portion of PPP Loans
Update: As of December 27, 2020, PPP expenses are now considered tax-deductible.
As part of the CARES Act, the Paycheck Protection Program (PPP) offers small businesses financial relief with loans of up to $10 million. If you comply with these general loan forgiveness guidelines, your loan will be partially or fully forgiven, and the funds will not need to be paid back. The Act specifically mentions that the forgiveness of the loans will not be taxable but did not address the deductibility of payroll costs and other approved expenses paid with these funds.
On Thursday, April 30, 2020, the IRS released guidance stating that since the income generated from the forgiveness of the loans through the Paycheck Protection Program (PPP) won’t be taxable, the related expenses will not be deductible. Notice 2020-32 clarifies that you may not claim wages, rent, etc. as a tax deduction if the expenses were used to generate tax-exempt loan forgiveness. This refers to Reg. 1.265-1, which states that no deduction is allowed to a taxpayer for any amount otherwise allowable if the deduction is allocable to income that is wholly exempt from taxes. The IRS explained that expenses that result in forgiveness of a PPP loan are not tax-deductible to prevent a “double tax benefit.”
This now means that the PPP funds are not quite as free as initially thought, however, the main benefit of having the needed cash flow to pay the company’s employees has not been diminished. These guidelines are continuously changing as the IRS continues to push out additional information, and we will have to wait and see if any further guidance on this issue is released in the coming months.
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This article was last updated on May 1, 2020, with the available guidance from IRS Notice 2020-32. As ambiguity remains in some of this guidance, please consult your advisor directly for more information. View the most up-to-date information in the PPP FAQ from the SBA and the Department of the Treasury.
As of May 18, 2020, the PPP Loan Forgiveness Application is now available on the SBA site. Apply here.