In Notice 2020-32, IRS recently provided guidance on the deductibility of expenses paid with proceeds from the Paycheck Protection Program loan for federal income tax purposes. The notice states that no deduction is allowed under the federal code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act and the income associated with the forgiveness is excluded from gross income. In short, business expenses that are paid using PPP loan proceeds that are later forgiven cannot be claimed as deductions on the taxpayer’s income tax returns.
While the CARES Act specifically notes the PPP loan forgiveness is exempted from taxable income, the IRS noted Section 265 of the tax code disallows expense deductions when expenses are paid with tax exempt income. Therefore, they concluded providing loan forgiveness and a tax deduction would be considered a double tax benefit.
Senator Chuck Grassley, chairman of the Senate Finance Committee, expressed his disappointment with this decision and stated this notice was contrary to Congressional intent.
