IRS Clarifies Deductibility of Expenses Associated with PPP Loan

The IRS today issued Notice 2020-32 (the Notice) relating to the deductibility for federal income tax purposes of certain otherwise deductible expenses related to amounts received pursuant to the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act established the PPP to provide employers with loans to pay costs associated with payroll, certain employee healthcare benefits, mortgage interest, rent, utilities, and interest on other existing debt obligations. PPP indebtedness may be forgiven to the extent the recipient of the PPP loan uses the proceeds to pay certain covered payroll, mortgage interest, rent, and utility costs during the applicable 8-week covered period. PPP loan forgiveness may be reduced or limited in certain circumstances, such as if a recipient employer reduces the number of full-time employees or reduces salary or wages by a specified amount. The CARES Act provides an exception to the general rule a taxpayer recognizes income if it has debt forgiven by providing that any portion of a PPP loan that is forgiven is excluded from the recipient’s gross income for federal income tax purposes.

The covered expenses giving rise to PPP loan forgiveness, such as payroll costs or mortgage interest, would normally be deductible by the taxpayer. The Notice provides if and to the extent PPP loan forgiveness is excluded from the recipient’s gross income, the recipient is not allowed a deduction for any eligible expense that gave rise to such loan forgiveness. Thus, for example, if a taxpayer has $1,000 of PPP loan forgiven because the taxpayer used the $1,000 to pay otherwise deductible payroll costs, the taxpayer would not be allowed any deduction for such payroll costs.