IRS says PPP loan expenses are not deductible... Congress says not-so-fast.

Bruce Claassen

May 6, 2020

Last week, the IRS released guidance (Notice 2020-32) which explained that a business receiving a Paycheck Protection Program Loan (PPPL) will not be able to deduct expenses that are normally deductible to the extent the expenses were covered by PPPL funds that were forgiven. 

 

Unless you've been living in a cave, you have heard of PPP loans, which were created by Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), PL 116-136.  Under Section 1106(b) of the CARES Act, an eligible small business/nonprofit recipient of a covered loan can receive forgiveness of the debt in an amount equal to the sum  of payments made for the following expenses during the eight-week period beginning on the day the loan is first funded:

1. Payroll Costs

2. Rents

3. Utilities

4. Certain mortgage interest

 

Section 1106(i) of the Act excludes the forgiveness from gross income.  In many circumstances under the existing tax code, debt forgiveness is taxable, so this is a special provision provided by the CARES Act.  The IRS is claiming in the new notice that the expenses paid for with the forgiven debt are not deductible, which is practically the same thing as making the forgiveness taxable.  Their reasoning for this is that under Section 265 of the tax code, expenses paid for with tax-exempt income are not deductible.  This rule, in essence, prevents double-dipping, and it was not a surprise to us to see the IRS take this position.

 

The problem is that this is not how Congress had envisioned things when they drafted the law.  Granted, the CARES Act was hastily written, and very poorly drafted.  As a result, the IRS and SBA have been forced to interpret (read between the lines) and provide guidance to the numerous areas where the Act provided little guidance on its own.  In many cases, the guidance issued by these agencies has come dangerously close to re-writing the original law.  In some cases, the answers they provide only lead to more questions, and in many cases, their guidance has not been taxpayer-friendly.

 

Yesterday, a group of congressional leaders formally notified the Treasury Department that they “believe the position taken in the Notice ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.” In other words, they're saying the IRS couldn't be more wrong in its interpretation.

 

 

The group is headed by Chuck Grassley and Richard Neal, the chairmen of the top tax committees in the Senate and the House, respectively. They also sit on opposite sides of the political aisle. That hasn't stopped them from coming together against a common enemy in this case.  They spoke in unison, formally rejecting the IRS’s position that PPP borrowers should not be entitled to the tax deductions and stating that they “did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for a PPP loan.”

 

We will continue to monitor this situation, but at this time, the expenses you pay with forgiven debt will not be deductible on your 2020 Federal income tax returns, so you should plan accordingly.   This year more than ever will require careful tax planning to maximize the benefits available to you and avoid the pitfalls in the myriad of laws that have been and are expected to be passed before year-end.

 

Also, visit our COVID-19 website page for news updates, and tools to help you navigate this ever-changing landscape. 

 

Please feel free to call us with any questions.