In Notice 2020-32, the IRS announced that otherwise deductible expenses paid with Paycheck Protection Program (PPP) loan proceeds that are eventually forgiven are not deductible for tax purposes.
PPP loans, which were created as part of the CARES Act, can be effectively turned into grants if the funds are spent on certain qualifying expenses during the 8-week period following the funding of the loan. At least 75-percent of the forgiven amount must be paid for payroll costs; other qualifying expenses include rent, utilities, and certain types of interest.
The CARES Act specifically states that the forgiveness of the PPP loan will not be considered taxable income. By eliminating the deduction for expenses paid with forgiven funds, the IRS’s notice effectively puts businesses in the same place they would be tax-wise if the forgiveness were taxable. While the IRS’s position is supported by the Code and case law, some members of Congress have stated that this was not the intent of the legislation. We will update you if the IRS’s position changes. Contact us at learnmore@BoulayGroup.com or 952.893.9320.