IRS Says No Deduction for PPP Loan Expenditures

May 1, 2020 | Article

The Paycheck Protection Program (PPP) provides key benefits to eligible borrowers. Yet borrowers are still faced with many unanswered questions concerning the program’s application. One key question was whether covered expenses giving rise to PPP loan forgiveness are deductible for federal tax purposes.

While the statutory language explicitly provides that the forgiveness of the PPP loan does not produce taxable income, the statute is silent regarding tax treatment of the eligible expenditures.

Need help sorting through loan forgiveness and its impacts? We’ve got you covered.

IRS Notice 2020-32 Regarding PPP Loan Expenditures
IRS Notice 2020-32 recently announced that the qualified expenditures resulting in PPP loan forgiveness are not tax deductible. This is a surprising development because it results in PPP loan forgiveness producing taxable consequences.

For example, assume the following facts:

  • A borrower properly secures a $100,000 PPP loan.
  • The borrower incurs $100,000 of eligible covered expenses during the covered loan period (beginning the date of loan funding), including at least $75,000 of eligible payroll expenses (prior governmental guidance states at least 60% of the eligible covered expenses must go towards payroll).
  • The borrower applies for and receives full forgiveness of the $100,000 PPP loan.

Ordinarily, a non-PPP forgiven loan produces income (sometimes referred to as “cancellation of indebtedness income”) but the loan proceeds can produce tax deductions. Under our simplified facts, this would produce $100,000 of cancellation of indebtedness income and an offsetting $100,000 of deductions.

In contrast, the forgiveness of a PPP loan does not result in cancellation of indebtedness income. But in holding that the corresponding eligible expenditures giving rise to the PPP loan forgiveness are not deductible, the IRS essentially negates the tax benefit and places a borrower in the same tax position they would be with the ordinary rules. Of course, the borrower received full use of the PPP loan proceeds without the obligation to pay it back.

The Impact of this Notice on PPP Loans and Forgiveness
This is a surprising tax result because the statute clearly intended to provide a tax benefit upon the occurrence of the PPP loan forgiveness. Some assumed the IRS would allow the qualified expenditures to produce a tax deduction to preserve the tax benefits. Members of Congress are suggesting they may preserve the intended tax benefits in the next round of stimulus legislation by allowing for the tax deduction.

For now, though, the disallowed deduction may make the PPP loan less attractive and encourage some borrowers to consider returning their loan. Borrowers have until May 7 to do so without penalty.

Let us help you sort through PPP loan forgiveness and potential loan expenditures.

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