IRS Releases Notice Regarding Tax Deductions and PPP Loan Funds
On Thursday, April 30, the IRS released Notice 2020-32. The announcement effectively disallows a tax deduction for any expenses that are paid via a forgiven Paycheck Protection Program (PPP) loan.
The PPP was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a historic $2.2 trillion stimulus package. The loan program allows small businesses to borrow funds equal to 2.5 months of their 2019 payroll from the Small Business Association (SBA). If their loan expenditures meet certain criteria—in brief, spending the money within eight weeks on payroll and other specific expenses—then the loan is forgiven.
Generally, when a taxpayer receives loan forgiveness, they are required to report the forgiven amount as income. However, section 1106(i) of the CARES Act explicitly states that income associated with forgiven PPP loans should be excluded from gross income.
On top of the tax savings from forgiven funds not being reported as income, many business owners were excited about the possibility of using PPP funds for tax-deductible purposes. For example, some business owners were hoping to offer their employees supplemental payments using the PPP funds. These would be tax deductible under Section 139. IRS Notice 2020-32 clarified that this tax deduction is not allowable. The statement says that, “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.”
For further details, click here to read the IRS announcement in full.