The IRS recently released Notice 2020-32, which provides the IRS’ position on the deductibility for federal income tax purposes of certain otherwise deductible expenses when a taxpayer receives a loan pursuant to the Paycheck Protection Program (“PPP”). Notice 2020-32 provides that no deduction is allowed for an expense that would otherwise be deductible if the payment of the expense results in the forgiveness of a PPP loan and the income associated with the forgiveness is excluded from gross income.
An employer that receives a PPP loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the eight-week period beginning on the loan’s origination date: (1) payroll costs, (2) interest on any covered mortgage obligation, (3) any covered rent obligation, and (4) any covered utility payment. Additionally, any amount that would otherwise be includible in gross income of the employer by reason of the forgiveness of the loan indebtedness is excluded from gross income.
Expenses such as payroll costs, interest on mortgage obligations, rent, and utility payments are expenses for which a deduction is generally permitted. However, in Notice 2020-32, the IRS explained that no deduction is allowed for any expenses paid by the proceeds of a PPP loan that is later forgiven. The purpose of this is to prevent a double tax benefit, where an employer uses the proceeds of a loan that is forgiven but excluded from income to pay expenses and then claims a deduction for those expenses.
Certain members of Congress have expressed disagreement with the IRS’ position, stating that disallowing deductions takes away the benefit of making the loan tax exempt, which was not Congress’ intention. Until additional legislation is passed, however, employers should assume that expenses paid with forgiven loan proceeds will not be deductible.
