The IRS released Notice 2020-32 to provide guidance that a taxpayer receiving a loan through the Paycheck Protection Program (PPP) under the CARES Act is not permitted to deduct expenses for Federal income tax purposes that are otherwise deductible under the Internal Revenue Code (IRC) to the extent that the payment of those expenses results in the forgiveness of the PPP loan and the income associated with the forgiveness is excluded from gross income for Federal income tax purposes. The notice further explains that, although the expenses paid with the PPP loan proceeds may be otherwise deductible, IRC Section 265 disallows a deduction to a taxpayer for any amount otherwise deductible that is allocable to income that is exempt from tax, with the purpose of preventing a double tax benefit.
The CARES Act itself does not specifically address whether a deduction is allowed for payments of eligible expenses where the PPP loan is subsequently forgiven. Some commentators believe that the IRS’s interpretation denying these deductions in Notice 2020-32 is contrary to Congressional intent when the CARES Act was passed, and Senator Chuck Grassley, chairman of the Senate Finance Committee, issued a statement saying that he was disappointed in the IRS decision.
We will keep you posted on any legislative action or further guidance on this issue. Please feel free to contact us with any questions you may have or visit our COVID-19 Updates & Resources page for more related information.