IRS says PPP loan forgiveness results in nondeductible expenses

The IRS issued Notice 2020-32 on the deductibility for federal income tax purposes of some otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan through the Paycheck Protection Program (PPP).

The PPP loan program was enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Included in the program is a loan forgiveness provision. Amounts eligible for forgiveness are based on funds used to cover certain payroll, mortgage interest, rent and utility costs paid within eight weeks of the loan’s origination date. In enacting the program, Congress stated the debt forgiveness “shall be excluded from gross income,” but did not codify or otherwise clarify the exclusion. Subsequently, the IRS weighed in with guidance under Notice 2020-32.

Specifically, the guidance clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan under the CARES Act and the income associated with the forgiveness is excluded from gross income.

Some ranking members in Congress were quick to disagree with the IRS’ position. Senate Finance Committee Chairman Chuck Grassley issued a statement saying, “The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible.” He added, “This notice is contrary to that intent.”

The House Ways and Means Committee Chairman Richard Neal said, through a spokesperson, “We are planning to fix this in the next response legislation.”

For the time being, we recommend taxpayers plan on these expenses not being eligible for deduction unless Congress acts. While initial indications are favorable, a correction would be part of a larger legislative package that presents the usual political roadblocks. Accordingly, we cannot predict whether Congress will take steps to clarify the intent of the CARES Act loan forgiveness provision.

Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.