PPP and Deductions

The IRS Released Notice 2020-32 which provides guidance on the deductibility of expenses paid with Paycheck Protection Program (PPP) loan proceeds that are partially or completely forgiven and excluded from a taxpayer’s income. Specifically, the IRS has determined that otherwise deductible expenses that are paid with PPP funds and forgiven may not be deducted for federal income tax purposes.

The CARES Act, expressly says that the PPP loan forgiveness amount are not to be treated as taxable income. However, under the new guidance a taxpayer’s inability to deduct the forgivable expenses essentially makes the PPP loan taxable to the extent it is forgiven. This means the benefit of the loan forgiveness is reduced by the effective tax rate of the taxpayer.

There are members of Congress who claim that this interpretation by the IRS is contrary to their legislative intent. The Senate Finance Committee Chair Chuck Grassley, R-Iowa stated, “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.” While House, Ways and Means Committee Chair Richard E. Neal, D-Mass., announced with his spokesperson Erin Hatch that “We are planning to fix this in the next response legislation.”

We will keep you updated on how Congress responds to this IRS guidance.