IRS Issues Guidance on Deductibility of Expenses Covered by PPP Loan

Posted on May 1, 2020December 28, 2021

AAFCPAs would like to make clients aware that on Thursday, April 30th, the IRS issued Notice 2020-32 providing tax compliance clarity related to Paycheck Protection Program (PPP) funds.

Under Notice 2020-32 the IRS concludes that no deduction is allowed for an expense that results in forgiveness under section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In other words, the proceeds of the CARES Act are not taxable, and the company utilizing them may not deduct expenses paid out of forgiven loan proceeds. This result is based on the IRS’ reading of Code Section 265, a longstanding rule that bars a deduction for expenses attributable to nontaxable income.

AAFCPAs advises taxpayers to consider this guidance while evaluating the PPP Loan. Considering that the CARES Act limited the ability to take both a PPP Loan and certain payroll tax benefits and credits, for some taxpayers that missed out on the PPP the difference might not be as great as first considered. Each taxpayer should talk to their AAFCPAs Tax Partner to discuss how this provision effects tax liability.

If you have any questions, please contact: Richard Weiner, CPA, MST at 774.512.4078, rweiner@nullaafcpa.com; or your AAFCPAs Partner.

About the Author

Richard Weiner, CPA, MST, CM&AA

Rich has over 30 years of broad tax experience with a specialty in tax planning and consulting for private and publicly-held businesses. Rich has specific expertise in the Software, Bio-Technology, Medical Device, Life Science, Manufacturing, Retail, Professional Service and Publishing industries, as well as U.S. aspects of international taxation. He works extensively with European companies expanding into the U.S. market. Additional areas of focus include companies and stockholders in transition, including structuring of and planning for Mergers & Acquisitions, planning for changes in ownership and management, and adoption of tax methodologies with a view toward the long term. He is well known in his field and is a frequent speaker on a variety of tax related topics.