IRS Releases Notice Regarding Tax Deductions and PPP Loan Funds

May 04, 2020

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On Thursday, April 30, the IRS released Notice 2020-32. The announcement effectively disallows a tax deduction for any expenses that are paid with forgiven Paycheck Protection Program (PPP) loan proceeds.

The PPP was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a historic $2.2 trillion stimulus package. The loan program allows small businesses to borrow funds equal to 2.5 months of specified payroll from the Small Business Association (SBA). If their loan expenditures meet certain criteria—in brief, spending the money within eight weeks on payroll and other specific expenses—then the loan may be forgiven.

Generally, when a taxpayer receives loan forgiveness, they are required to report the forgiven amount as income. However, section 1106(i) of the CARES Act explicitly states that income associated with forgiven PPP loans should be excluded from gross income.

The Notice appears to be counter to Congressional intent. Senator Chuck Grassley (R-IA), the chairman of the Finance Committee, voiced his disappointment with the Notice upon its release. The IRS contends that Congress will need to act if a different result is intended.

For further details, click here to read the IRS announcement in full.