IRS Update: Deductions Related to Forgiven PPP Loans are Non-Deductible

There have been several additional developments over the last few weeks regarding the Paycheck Protection Program (“PPP”). Even after these developments, many aspects of the PPP are still uncertain, including how the amount of the loan forgiveness will be calculated. The CARES Act was clear that the amount of forgiveness will not be included in gross income for federal income tax purposes. This added additional relief to the Program and seemed to allow a double benefit for recipients of these loans resulting from tax free loan forgiveness and tax deductions for the related payroll and other costs paid from the loan proceeds.

They say that when something sounds too good to be true it usually is, and so it is with a PPP loan! Last week, the Internal Revenue Service (“IRS”) issued Notice 2020-32, relating to the deductibility, for Federal Income Tax purposes, of the expenses paid with the proceeds of a PPP loan that is subsequently forgiven.

Subject to certain limitations which were covered in our previous memo, PPP loan proceeds used by recipients to fund qualified payroll costs, mortgage interest, rent, and utility expenses are eligible for forgiveness.

Notice 2020-32 states that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the PPP and such loan forgiveness is excluded from gross income. Essentially, when a business excludes the forgiven loan proceeds from gross income, then that business does not receive the tax benefit of deducting the expenses that were paid with the forgiven loan proceeds.

When Congress passed the legislation creating PPP loans, they carefully thought to exclude any forgiveness from gross income for federal income tax purposes. It seemed likely that their intent was to maximize the value of the relief to struggling businesses and their employees by providing the funding to maintain wages and benefits. The IRS, on the other hand, looked to the Internal Revenue Code and case law to determine that recipients should not receive a double benefit. The Internal Revenue Code denies a tax deduction for otherwise deductible expenses that are related to tax exempt income, such as PPP loan forgiveness.

Disclaimer: Please note this is based on the information that is currently available and is subject to change.

Helpful Resources

Coronavirus (COVID-19): Small Business Guidance & Loan Resources

Coronavirus Tax Relief

AICPA State Tax Filing Relief Chart for Coronavirus

The Treasury and the SBA continue to update, change and clarify the guidance related to the PPP Loan Program. In the meantime, we will continue to update you as more information becomes available as our Schmidt Westergard COVID-19 Resource Team monitors the ongoing flow of clarifications and additional guidance from the Treasury and other governmental agencies. Please contact your Schmidt Westergard team for additional information.

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