PPP Loans – IRS Denies Tax Deductions For Wages And Expenses

Yet another setback for the Paycheck Protection Program? This morning in our FYI post PPP Loan Borrowers – Be Prepared to Prove Lack of Liquidity As A Basis For Your Loan, we discussed new guidance from the SBA regarding the good faith certification and borrower liquidity. Like many others we have also been seeking clarification on how loan forgiveness under the program would interact with Internal Revenue Code (IRC) Section 265. Specifically, the question as to whether PPP loan borrowers would be allowed to exclude forgiven loan amounts from taxable income and deduct covered expenses as ordinary business expenses. 

On April 30, 2020, this question was answered when the IRS released Notice 2020-32 where it applies IRC Section 265(a)(1), which disallows a deduction for expense amounts that would otherwise be deductible if the amounts are allocable to one or more classes of tax-exempt income. The IRS has concluded that the CARES Act exclusion from income for forgiven PPP loan amounts results in a “class of exempt income” under federal tax laws and regulations. As a result, any permitted payments qualifying for PPP loan forgiveness will not be deductible on your federal income tax return.

A full copy of IRS Notice 2020-32 is available at: https://www.irs.gov/pub/irs-drop/n-20-32.pdf

We will continue to monitor and update our readers on important changes related to loan requirements and forgiveness under the Paycheck Protection Program.