On April 30, 2020, the Internal Revenue Service (IRS) released Notice 2020-32 regarding the deductibility of certain expenses relating to the Paycheck Protection Program (PPP).
Notice 2020-32 sets forth the IRS’ official position on the deductibility, for federal income tax purposes, of certain expenses incurred in a taxpayer’s trade or business when the taxpayer receives loan forgiveness pursuant to the Paycheck Protection Program related to those trade or business expenses.
In Notice 2020-32, the IRS’ stated position is that no income tax deduction is allowed for the expenses if those expenses result in forgiveness of a covered loan under the PPP because the income that ordinarily would be recognized as a result of loan forgiveness is specifically excluded from gross income pursuant to the CARES Act.
The bottom line for PPP loan borrowers is that for any amount of gross income excluded from taxable income (i.e., the amount of the PPP loan actually forgiven and not paid back), an equal amount of otherwise tax deductible expense will be considered nondeductible for federal income tax purposes. The IRS’ position is that this prevents a double tax benefit.
We do note, however, that Congressional leaders (including Senators Grassley (R) and Widen (D), the chair and ranking minority member, respectively, of the Senate Finance Committee and Representative Neal (D), the chair of the House Ways and Means Committee, along with leadership in both parties), the staff of the Joint Tax Committee and professional associations (e.g., the AICPA and the U.S. Chamber of Commerce) have publically indicated that the IRS’ positon as set forth in Notice 2020-32 is inconsistent with the legislative intent of the CARES Act. We expect there may be more guidance on this in coming months, perhaps by Congressional action.
To learn more about IRS Notice 2020-32 and to plan your approach, contact a member of the Hirschler tax team or another qualified tax adviser.
Kristen M. Chatterton