May 5, 2020

IRS Disallows Expenses Attributable to Forgivable PPP Loans

By Michael D’Addio, Principal, Tax & Business Services

IRS Disallows Expenses Attributable to Forgivable PPP Loans Paycheck Protection Program

On April 30, 2020. the IRS issued a Notice addressing an issue regarding the deductibility of expenses under the Paycheck Protection Program. IRS Notice 2020-32, states that a deduction will not be allowed for an otherwise deductible expense that results in forgiveness of a Paycheck Protection Program loan.

While the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides that the amount forgiven will not produce taxable income, it gives no direction as to deductions funded by the loan proceeds.

As anticipated, the IRS is using IRC Section 265 as the basis to deny deduction. This Code Section denies deductions which are allocable to one or more classes of income that is wholly exempt from tax. The purpose of this provision is to prevent a double tax benefit. The IRS has used this theory in many cases to deny deductions.

This IRS decision may not be the result that Congress intended. The question is whether Congress will address this matter in future Coronavirus legislation. This rule could be changed before there is any actual debt forgiveness.

If you have any questions, contact your Marcum tax professional or contact Michael D’Addio at 203.781.9665 or email Michael.

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