PPP Loan Forgiveness and Expense Deductibility

We have been asked the following question often – “Can a taxpayer deduct the expenses paid with a Paycheck Protection Program loan if the loan is forgiven?”  Now IRS has answered this question by providing Notice 2020-32.

The CARES Act states this forgiveness is not taxable income to the borrower, but the CARES Act does not address the deductibility of the expenses paid by the PPP proceeds.  Thus, IRS has released this Notice to address this question.

Specifically, the Notice clarifies 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 a covered loan.  A “covered loan” is a loan obtained under the PPP which can be forgiven if the loan proceeds are properly used, within 8 weeks, to pay qualified expenses such as:

1) Payroll costs,

2) Interest on mortgage obligations,

3) Rent obligations, and

4) Utility payments.

This “nondeductibility of expenses” is the treatment required by IRC Section 265(a)(1) and Regulation §1.265-1.

This treatment makes sense to us.  It would be illogical (not to say all tax matters are logical) to permit a taxpayer to deduct expenses that the taxpayer, in essence, didn’t pay out of the taxpayer’s own pocket.

Maybe Congress will choose to change the law to let taxpayers deduct expenses that were paid by nontaxable income (i.e., double dipping).  Time will tell.

Notice 2020-32 can be found on our web site (ataxprof.com) under the Tax Pros Newsletters tab, or by going to irs.gov/pub/irs-drop and clicking on n-2020-32.

This text has been shared courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065, fax 920-496-9111, ataxprof.com.