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No deduction for business expenses paid with forgiven PPP loan proceeds

Paycheck Protection Program – No Deduction Allowed for Expenses Paid with Forgiven Paycheck Protection Program Loan Proceeds – IRS Notice 2020-32

On April 30, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-32 which explains no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The CARES Act excludes Payroll Protection Program loan forgiveness from taxable income. However, that law did not address the deductibility of expenses paid with the Payroll Protection Program loan proceeds. Per the IRS Notice 2020-32, loan forgiveness under the Payroll Protection Program is a class of exempt income, and expenses allocable to that exempt income are nondeductible. Therefore, payroll costs, rent, utilities, and the other allowable Payroll Protection Program expenses paid with the loan proceeds are not deductible to the extent the loan is later forgiven. This is consistent with existing IRS law and policy so that a small business does not receive a double tax benefit.