IRS Denies Deductions for Expenses Paid with Forgiven PPP Loans

On April 30, 2020, the Internal Revenue Service issued guidance in Notice 2020-32 providing 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 loan under the Payroll Protection Program (“PPP”) established by the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

While the guidance seems consistent with applicable law, it is not clear whether it is consistent with Congress’ intent -- and at least one member of Congress has stated it is not. The CARES Act specifically provides that any portion of a PPP loan that is forgiven pursuant to the terms of the PPP is excluded from gross income; the CARES Act does not address deductions. Under normal federal income tax principles, forgiveness of a loan is includible in taxable income, but the forgiveness does not affect any deductions that otherwise would be allowed. Consider two taxpayers. One has loan forgiveness under the PPP and otherwise deductible expenses. The other has loan forgiveness not covered by the PPP and otherwise deductible expenses. These two taxpayers will have the same tax consequences – which raises the question why Congress provided that PPP loan forgiveness is not includible in taxable income. Congress might clarify this point with a technical corrections bill.

To learn more about these developments, please contact a member of our Tax Group.

For more guidance on issues related to the coronavirus pandemic, please visit our COVID-19 Resource Center.