Paycheck Protection Program - No Deduction for Expenses Allocable to Forgiven Income

UPDATE: On May 5, 2020 a bipartisan group of Senators introduced Senate Bill 3612 which would reverse the IRS’ position in Notice 2020-32 (detailed below), and provide that expenses which are paid with PPP loan proceeds can still be deducted by taxpayers even if the loan is later forgiven.  We will continue to provide updates as new information becomes available.

On April 30, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-32 which explains expenses paid with Paycheck Protection Program (“PPP”) loan proceeds are nondeductible for tax purposes to the extent the PPP loan is later forgiven.

The CARES Act specifically excludes PPP loan forgiveness from taxable income, but is silent as to the deductibility of expenses paid with the loan proceeds. Per the IRS in Notice 2020-32, under the Internal Revenue Code and existing guidance, loan forgiveness under the PPP is a class of exempt income, and expenses allocable to that exempt income are nondeductible. Therefore, payroll costs, rent, and the other allowable PPP expenses paid with the loan proceeds are not deductible to the extent the loan is later forgiven. This ensures the taxpayer does not receive a double tax benefit.

The practical effect of Notice 2020-32 is the same as if Congress had not provided an exemption from taxable income for the forgiveness of PPP loans. Members of Congress on both sides of the aisle have expressed dissatisfaction with the IRS’ position in Notice 2020-32.  Senator Richard Neal (D-Mass.) has stated Congress plans to reverse the IRS’ position in forthcoming legislation to ensure taxpayers can deduct expenses paid with PPP proceeds on their federal income tax returns. Absent legislation or a change in the IRS position, taxpayers are barred from deducting expenses paid with PPP loan proceeds which are later forgiven.

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