May 1, 2020 |
On April 30, 2020, the IRS Released Notice 2020-32 which provides guidance on the deductibility of expenses paid with Paycheck Protection Program (PPP) loan proceeds that are partially or completely forgiven and excluded from a taxpayer’s income. Specifically, the IRS has determined that otherwise deductible expenses that are paid with PPP funds and forgiven may not be deducted for federal income tax purposes.
Under the PPP provisions of the CARES Act, borrowers who pay certain covered expenses (payroll costs, benefits, rent, interest and utilities) using funds borrowed under the PPP program may have some or all of their loan forgiven. The CARES Act also provides that amounts forgiven shall be excluded from the borrower’s taxable income.
Prior to the release of Notice 2020-32, it was unclear whether borrowers would be able to exclude forgiven loan amounts from taxable income and deduct covered expenses as ordinary and necessary trade or business expenses. Under this new guidance, the IRS applied Section 265(a) of the Internal Revenue Code (IRC) to disallow an otherwise allowable tax deduction. IRC Section 265(a) disallows a deduction for amounts that are otherwise deductible if the amounts are allocable to one or more classes of tax-exempt income. The IRS concluded that the CARES Act exclusion from income for forgiven PPP loan amounts results in a “class of exempt income” under the federal tax laws and regulations and are thus disallowed under IRC Section 265(a).
Notice 2020-32 eliminates otherwise appropriate business tax deductions that were excluded from taxation under the CARES Act. The guidance will impact tax planning for PPP loan borrowers and the overall value of the PPP loan forgiveness program.
Compliments of Marks Paneth – a member of the EACCNY