IRS Hits the Brakes on Deducting PPP-Related Expenses

The IRS had some unwelcome news for plan advisors and small businesses that may be taking advantage of forgivable loans under the Paycheck Protection Program.  

 

In short, the IRS is saying no to the potential for a double-tax benefit. The IRS advises in Notice 2020-32 released April 30 that it will not allow a tax deduction for an expense that is otherwise deductible under Code Sections 162 and 163 if the payment of the expense results in forgiveness of a covered loan under the PPP. 

The IRS points to Code Section 265 to justify its reasoning for denying deductions for forgivable loans, noting that the purpose of that section is to prevent a double tax benefit. It specifies that no deduction is allowed to a taxpayer for any amount otherwise allowable as a deduction to such taxpayer that is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by the Code. 

 

Enacted March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act established the PPP and provides that the income associated with the forgiveness is excludable from gross income for purposes of the tax code. The PPP provides that a loan will be forgiven in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period”:

 

The CARES Act also specified, however, that the amount of the covered loan forgiveness is reduced if, during the covered period: 

 

In addition, an interim final rule issued by the Small Business Administration stipulates that no more than 25% of the amount forgiven can be attributable to non-payroll costs. 

 

The IRS further notes that the CARES Act is silent on whether such expenses that are paid for with a forgiven loan are deductible. To that end, it’s possible, though not certain, that Congress could revisit this issue in subsequent legislation. The AICPA has already indicated that it will seek “legislative clarification.” 

 

Meanwhile, the SEC recently advised that, under certain circumstances, registered investment advisors must disclose forgivable loans they have received under the PPP.