On April 30, 2020, the IRS released guidance (Notice 2020-32) explaining that qualifying expenses that are the basis for loan forgiveness under the Paycheck Protection Program (PPP) will not be tax deductible. PPP loans are administered by the U.S. Small Business Administration (SBA) and became available under the Coronavirus Aid, Relief, and Economic Security Act (CARES), providing much-needed relief to millions of small businesses.
Under the PPP, some businesses will qualify for loan forgiveness as long as the PPP loan proceeds are spent on qualifying expenses during an 8-week forgiveness period. Those qualifying expenses, generally, are payroll costs, rent, utilities and certain interest. Under normal circumstances, those qualifying expenses would be deductible in determining taxable income. Under the PPP, the CARES Act statute specifically states that any loan forgiveness granted will not be included in taxable income. However, IRS Notice 2020-32 reasons that under Internal Revenue Code section 265, no deduction should be allowed for expenses paid with loan proceeds that were received tax free, effectively eliminating the tax-free benefit of the PPP.
While this action is consistent with historic IRS positions, it is certainly not what businesses receiving PPP loan forgiveness were hoping to hear. Congress has the ability to override the IRS by passing a law that explicitly allows the deductions, and the American Institute of CPAs (AICPA) is challenging this position, but for now, those qualifying expenses will be considered nondeductible.
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Bert Mills, CPA, is the Managing Partner at Moore Colson. In his role, Bert sets the vision and mission of the Firm and works closely with the Firm’s leadership to drive and implement strategies.
Andy Starnes, CPA, is a Partner and Tax Services Practice Leader Moore Colson. Andy’s specialties include corporate tax compliance and planning, business consulting and multi-generational planning with a focus on the construction, professional services and staffing industries.