On April 30, 2020 the IRS released Notice 2020-32 which 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 Paycheck Protection Program (PPP).
Under the PPP, qualified businesses will not have to pay back the loan so long as 75% of the funds were spent on payroll and there is no reduction in employee headcount or pay amounts. The remaining portion could be spent on other qualifying expenses such as utilities and mortgage interest. The CARES Act provides that such forgiven amounts are not taxable income. Generally, expenses such as payroll, utilities, and interest are deductible for Federal income tax purposes; however, Notice 2020-32 provides that to the extent the expenses are paid with PPP funds and the loan is forgiven, then no deduction will be allowed. The IRS cites Internal Revenue Code section 265 as its authority for this Notice, and says it is necessary to prevent a “double tax benefit.”
While Congress has the authority to override the Notice, businesses should take into consideration the denial of the deductions when determining whether to borrow under the PPP.
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