Published May 1, 2020

Bad News for PPP Loan Participants

Disclaimer: To the best of our knowledge, this information was correct at the time of publication. Given the rapidly developing situation, and with the possibility of new guidance being issued at any time, be aware that some or all of this information may change. Please visit PYA’s COVID-19 hub frequently for the latest updates, as we are working diligently to put forth the most current information as it becomes available.

The Paycheck Protection Program (PPP) loan created within the Coronavirus Aid, Relief, and Economic Security (CARES) Act offered hope to many small businesses struggling with uncertainty. The components of the PPP loan have been widely publicized, yet many questions remained.

Many taxpayers have asked whether expenses ordinarily deductible under Internal Revenue Code (IRC) §162 would still be deductible if they were paid with received PPP funds that were subsequently forgiven. IRC §265(a)(1) precludes a taxpayer from receiving a tax benefit from both: 1) tax-free discharge of indebtedness income, and 2) the deduction of expenses paid with funds received from a tax-free source. While the IRC is clear on this point, hope remained that the Treasury would provide an exception for qualifying expenses paid with proceeds from subsequently forgiven PPP loans.

On April 30, the Internal Revenue Service (IRS) released Notice 2020-32, which answered this outstanding question in the negative. Per the Notice, qualifying expenses ordinarily deductible under §162 are not deductible if paid with funds received from a PPP loan that is granted forgiveness. For taxpayers, this means that all “qualifying expenses” under the PPP, such as payroll, rent, and utilities, will be nondeductible when taxpayers file their tax returns for the period covering the eight-week window (for calendar-year taxpayers, it will be the return for the year ending December 31, 2020).

Ultimately, taxpayers participating in the PPP loan received an infusion of liquidity with the promise of potential forgiveness. However, many program participants may not have anticipated the limited deductibility of covered expenses. So, while this notice is consistent with the IRS’s historic position matching the taxability of income with the deductibility of related expenses, this is not the answer thousands of struggling taxpayers wanted, or perhaps expected, to hear.

PYA has established a COVID-19 information hub to help you through these uncertain times. If you have any questions about this development, or other COVID-19 related matters, contact one of our PYA executives below at (800) 270-9629.

Executive Contacts

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