Coronavirus News

IRS releases notice providing guidance on the deductibility of otherwise allowable business expenses when receiving a Payroll Protection Program loan

The IRS released Notice 2020-32 on April 30 providing guidance on the deductibility of otherwise allowable business expenses when the taxpayer receives a Payroll Protection Program loan (PPP). Notice 2020-32 clarifies that no deduction is allowed for federal income tax purposes for business expenses that are traditionally deductible if the payment of the expense results in the forgiveness of a PPP loan.

The CARES Act provides that if a recipient of a PPP loan uses the proceeds to pay employees, rent, utilities, and mortgage interest over an eight week period, the loan will be partially or fully forgiven. The forgiveness of a loan by a lender generally constitutes taxable income for federal income tax purposes. However, the provisions in the CARES Act specifically exclude the debt forgiveness from taxable income. The question still remained as to whether PPP expenses that trigger the non-taxable debt forgiveness would be deductible. The IRS applied the principles of existing tax law to reach its conclusion in Notice 2020-32, stating that expenses that are allocable to tax exempt income are not deductible.

Congress could override the IRS’ ruling by passing a law that expressly allows the deductions. You can read the complete Notice HERE. Or, contact a Dugan & Lopatka professional for additional guidance at (630) 665-4440 or info@duganlopatka.com.

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