IRS Says No Deductions for Expenses Paid with Forgiven PPP Loans
In Notice 2020-32 the IRS lays out its legal argument that the expenses covered by the forgiven Payroll Protection Program (PPP) loans represent an expense related to tax-exempt income under Code Section 265(a). Thus, the payment of the expenses (salaries, rents, interest, etc.) that qualify the PPP loans for forgiveness is also not deductible.
DMJ & Co., PLLC Opinion Statement: While the IRS position is fairly clear and logical to follow, the CARES Act intended for the loan to be tax-free income. We would argue that exempting the receipt of the forgiveness from tax, but then disallowing the expenses used in the forgiveness is not the intent of Congress. There is no point in making income "tax-free" if you cannot deduct the otherwise deductible expenses where the proceeds of the loan are used. If Congress intended this result, then they would not have made the PPP forgiveness tax-free, because there is no economic difference between (1) taxing the loan forgiveness and leaving the related deductions intact, and (2) allowing the forgiveness to be tax-free but then denying the deduction in the use of the funds.
Any tax advice contained herein was not intended or written by the practitioner to be used by the taxpayer, and it should not be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
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