Are Expenses Paid With PPP Loan Funds Deductible?
May 4, 2020
Asking if ‘expenses paid with PPP loan funds are deductible?’ may seem like a silly question since expenses paid by businesses are generally deductible. The issue surfaced in the CPA community shortly after the CARES Act passed, and the IRS recently issued their opinion.
The CARES Act was signed into law by President Trump on March 27, 2020, to provide COVID-related economic relief. If you’re not familiar with loans made under the Paycheck Protection Program (PPP), you can read about them here.
One of the main benefits of the Program is the fact that a portion of or the entire amount of the loan can be forgiven, effectively making it a grant. Normally the cancellation of debt owed by a taxpayer is taxable. However, the CARES Act indicates that the forgiven amount of a PPP loan is excluded from income for income tax purposes.
However, some began to wonder if expenses paid with PPP loan funds that were forgiven would be deductible. After all, once forgiven, the funds are essentially provided by the government tax-free and do not represent out-of-pocket costs incurred by the business. The IRS was also considering this issue, as the CARES Act was silent on it. On May 1, 2020, the IRS issued Notice 2020-32 to address this topic.
In this notice, the IRS concluded that payments made from forgiven PPP funds are not deductible. The IRS reached this conclusion by determining that these forgiven funds create a class of tax-exempt income. Under Section 265 of the Internal Revenue Code and associated Regulations, expenses associated with such a class of income are not deductible. To support their conclusion, the IRS cites a variety of prior rulings and cases involving deductions associated with other tax-exempt income that were also not deductible.
While it is unclear if this conclusion is what Congress intended, we understand that some members of Congress disagree agree with it. We expect there could be Congressional action taken or guidance given to the IRS to reverse this conclusion. Until then, we must assume that the IRS will stand by its conclusion to deny deductions paid with forgiven PPP loan funds.
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