IRS: Expenses Paid with Forgiven PPP Loans are Not Tax Deductible

Filed in Codes and Standards, Economics by on May 1, 2020 5 Comments

The Internal Revenue Service on April 30 issued guidance that states that employers who received loans through the Paycheck Protection Program (PPP) will not be eligible for tax deductions on expenses if payment of those expenses funded by the loan results in the loan being forgiven.

Specifically, IRS Notice 2020-32 provides guidance regarding the deductibility for federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan pursuant to the PPP.

The notice clarifies that 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 the loan.

In general, the tax rules for a business-related loan are:

  • Wages/health care/rent/utilities are a deductible expense
  • Debt forgiven is taxable income

For businesses with a PPP loan that is forgiven, these rules generally reverse themselves:

  • PPP debt forgiven is not taxable income
  • Wages/health care/rent/utilities paid via the forgiven debt are not

For PPP loans forgiven pursuant to the CARES Act, the IRS will disallow any otherwise allowable deduction under any provision of the tax code to the extent of the resulting PPP loan forgiveness (up to the aggregate amount forgiven).  In the view of the IRS, this treatment prevents a double tax benefit.

NAHB is providing this information for general information only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. Before making any decision or taking any action on this information, you should consult a qualified professional adviser to whom you have provided all of the facts applicable to your particular situation or question. 

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Comments (5)

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  1. Mark Harris says:

    The IRS has decided to go against the intent of Congress and President Trump. By deciding the expenses paid are not deductible the additional benefit intended has been removed.
    Hopefully Pres Trump and Congress will slap the hand or the IRS for its overreaching regulation

    • MLP says:

      Absolutely agree. These expenses were already deductible! Not taxing forgiven PPP amounts didn’t grant a “double benefit,” it intentionally ADDED a tax benefit to what already existed. Disallowing deductible expenses up to the amount forgiven is, in effect, making the forgiveness amount taxable income and removing this added benefit. The CARES Act was written to help businesses as much as possible during this unprecedented time, shame on the IRS for deciding to take any of that away.

      • Alan Edgar Hanbury says:

        I believe the intent was to help the employees not the business by making it a net zero for the business and the employees still get paid so they can pay their bills and hopefully still be alive and willing to work for the company when the dust settles. Yes IRS sucks but paying all this largesse back is and should be considered when we decide to deride it’s application of congress’s intent.

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