No Taxable Income Means No Deductions Related to PPP Loans

Published on May 5, 2020

On April 30th, 2020, the IRS released Notice 2020-32 in regards to how to treat expenses related to PPP loans. The CARES Act created the Payroll Protection Program (“PPP”), where certain employers could apply for loans and if they met the required criteria, those loans would be forgiven. The CARES Act specifically stated that the typical rules that require forgiveness of debt to be included in the taxpayers income, would not apply for any forgiveness due to participation in the PPP loan program. 

Notice 2020-32 clarifies that with the income not taxable, general business expenses that are normally allowed as a deduction under Section 162, would not be deductible. Under Section 265(a)(1) of the Code and Regulations §1.265-1, no deduction is allowed to a taxpayer for any amount otherwise deductible when that deduction is allocable to one or more classes of income wholly exempt from the taxes.

Therefore, to the extent that section 1106(i) of the CARES Act operates to exclude the loan forgiveness from gross income, any otherwise allowable deduction, would not be deductible because such payment is allocable to tax-exempt income. Consistent with the purpose of section 265, this treatment prevents a double tax benefit.

However, there is currently a push by several members of Congress to change the IRS’ stance on non-deductibility. A bill has been introduced that would nullify the IRS Notice and allow a deduction for expenses associated with the PPP Loans. The lawmakers have stated that disallowing these expenses was not an intended consequence of the PPP Loans. We will continue to follow to see how this issue progresses.

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.

Brandy Vannoy
Brandy Vannoy | Partner