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No Deduction for Expenses Paid with Forgiven PPP Loan Funds

May 1, 2020 Business & Tax Blog Payment Protection Program

One of the major business-tax relief provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is the paycheck protection program (“PPP”) loan forgiveness and the accompanying exclusion of the forgiven amounts from taxable income. Over the past month since the CARES Act’s enactment, the IRS has released guidance clarifying the interaction between PPP loan forgiveness and other provisions of the Act. However, a lingering, big-picture question regarding the deductibility of certain business expenses paid for with later forgiven PPP loan funds remained. Such expenses include mortgage interest, rent obligations, utility payments, and payroll costs—all covered uses of a PPP loan. 

Yesterday, April 30, 2020, the IRS finally addressed this question in Notice 2020-32, concluding 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 PPP loan. To reach this decision, the IRS relied on Code section 265, which prohibits businesses from deducting expenses associated with income that is tax-free. The IRS, therefore, determined that allowing taxpayers to deduct expenses paid for by tax-exempt, forgiven loan funds is considered double-dipping under the Code. We disagree with the position, in part because it obviates the “tax-free” forgiveness of the loan. Why else would Congress have provided that the loan forgiveness is tax-free when a taxpayer could offset taxable income from the debt forgiveness with deductions from paying wages, rent, utilities and other qualifying expenses?

It now will be up to Congress to pass legislation changing this result if it is not the outcome Congress intended.

Partner John Wagner contributed to this post.