Businesses Receiving PPP Loans Cannot Claim Tax Deductions for Expenses

by: Smith and Howard

May 1, 2020

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This article was updated on May 1 at 5:10 p.m.

On Thursday, April 30, the Internal Revenue Service (IRS) issued guidance on expenses related to the Paycheck Protection Program (PPP). The guidance states that businesses with forgivable loans cannot claim tax deductions for expenses covered by the PPP.  The IRS Notice 2020-32 is expected to be published on May 18, 2020.

The IRS 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 a covered loan” as outlined by the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Expenses that are not eligible for tax deductions include:

  1. Payroll costs
  2. Certain employee benefits relating to healthcare
  3. Interest on mortgage obligations
  4. Rent
  5. Utilities
  6. Interest on any other existing debt obligations

As a reminder, any amounts forgiven are not taxable pursuant to the CARES Act. This notice while punitive actually corrects what we believe was an unintended benefit in the original law which provided the exclusion from income the loan forgiveness and presumably a deduction for the expenses (funded via the forgivable loan) which in effect doubled the benefit for the same dollars.

This guidance will have an effect on tax planning for borrowers. If you need help or more information about how this notice may affect your business, please contact your Smith and Howard advisor or fill in the form below.

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