Expenses Paid with Payment Protection Program Loans are not Deductible
On Thursday, April 30, the IRS released Notice 2020-32. It disallows a tax deduction for any expenses paid via a forgiven Paycheck Protection Program (PPP) loan.
The PPP is a historic $2.2 trillion stimulus package. The loan program allows small businesses to borrow funds equal to 2.5 months of their 2019 payroll from the Small Business Association (SBA). If their loan expenditures meet specific criteria—in brief, spending the money within eight weeks on payroll and other particular expenses—then the loan is forgiven.
Generally, when a taxpayer receives loan forgiveness, they are required to report the forgiven amount as income. However, section 1106(i) of the CARES Act explicitly states income associated with forgiven PPP loans should be excluded from gross income.
On top of the tax savings from forgiven funds not being reported as income, many business owners were excited about the possibility of using PPP funds for tax-deductible purposes.
Example: Some business owners were hoping to offer their employees supplemental payments using the PPP funds. These would be tax deductible under Section 139. IRS Notice 2020-32 clarified this tax deduction is not allowable. The statement says, “no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.”