No Deduction Allowed for Expenses Resulting in PPP Forgiveness

Alerts / May 4, 2020

Ending weeks of speculation and debate, the IRS has issued guidance confirming that no deduction is allowed for an otherwise deductible expense if the payment of the expense results in forgiveness of a Paycheck Protection Program (PPP) loan. Pursuant to the CARES Act, PPP loan recipients are eligible for forgiveness equal to payments made for certain expenses, including payroll costs, mortgage interest, rent, and utilities, during the eight-week period following the loan’s origination. Because the CARES Act specifically excludes this loan forgiveness from gross income, taxpayers were left uncertain whether such expenses would also be deductible for purposes of calculating taxable income.

In Notice 2020-32, the IRS relies on Code Section 265, which is intended to prevent a “double benefit” by disallowing a deduction for amounts allocable to tax-exempt income. Although lawmakers on both sides of the aisle have expressed disagreement with the IRS position, arguing the Notice is contrary to their intent, taxpayers will have to wait on further legislation permitting deduction of these expenses.

Authorship Credit: Michelle M. Hervey

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