No Tax Deduction for Expenses Paid with Forgiven PPP Loan Funds

Del YounglasCOVID-19, Featured News

Featured News

Some of the provisions below have been modified by the Paycheck Protection Program Flexibility Act (PPPFA) which was signed into law on June 5, 2020. Click here for our article on PPPFA.

By: Chris Anderson, Shareholder

In the CARES Act, Congress has allowed borrowers under the Paycheck Protection Program (PPP) to have some or all of their loan forgiven if they meet certain requirements.  See loan forgiveness details in our previous article, “PPP Economic Need and Loan Forgiveness”.  In Notice 2020-32, the IRS has provided that taxpayers are not permitted to deduct any payments made with funds from a PPP loan that has been forgiven.  While this is not a favorable result, keep in mind that PPP loans are not taxable income to borrowers.

The IRS reasoned in its Notice that allowing taxpayers to deduct expenses paid with PPP funds would provide a double tax benefit which is inconsistent with Internal Revenue Code Section 265.

Presumably, any payments with PPP loan proceeds that are not part of the forgiveness amount are deductible.  For example, if a borrower obtained a PPP loan of $200,000 and was permitted loan forgiveness of $185,000, the borrower would be permitted to deduct $15,000 of expenses that were not part of the PPP forgiveness (assuming the payments were otherwise deductible under the applicable Code sections).

The Department of the Treasury and the SBA are expected to release guidance on PPP forgiveness matters in the near future.  In the interim, please see our recent article (at the above link) for details about forgiveness issues and documentation suggestions. If you have questions or need assistance with this or any CARES Act, PPP or other COVID-19 accounting and tax related challenges, please contact your Maloney + Novotny representative or use this online contact form.