On April 30, 2020, the IRS released Notice 2020-32 which provides guidance on the deductibility of expenses paid with Paycheck Protection program (PPP) loan proceeds. The notice states that businesses that qualify for loan forgiveness under the Paycheck Protection Program (PPP) cannot claim tax deductions when the loaned PPP money is used to pay business expenses.
In normal times, the tax code allows companies to fully deduct business expenses, such as payroll costs, benefits, rent, interest and utility expenses, but generally does not allow write-offs for tax-exempt income. However, under the CARES Act, the PPP loan forgiveness is not counted as taxable income.
The IRS stated that the purpose for the notice is to avoid allowing a taxpayer to obtain a double tax benefit by receiving both tax exempt income from PPP loan forgiven amounts and tax deductions for expenses paid with those same loan proceeds. The IRS cited Section 265 of the tax code, which states that deductions cannot be taken if they are tied to a certain class of tax-exempt income.
Notice 2020-32 eliminates otherwise appropriate business tax deductions that were excluded from taxation under the CARES Act. The guidance will impact tax planning for PPP loan borrowers and the overall value of the PPP loan forgiveness program.
There is a possibility that Congress could take legislative action to overrule Notice 2020-32.
We are following this closely and will continue to keep you updated. Visit our COVID-19 Website Page for additional updates and guidance on the coronavirus (COVID-19).
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