Paycheck Protection Program Guidance From the IRS

Will Tax Deductible Expenses Be Derived With the Use of PPP Funds Forgiven?

The Internal Revenue Service (IRS) released Notice 2020-32 regarding certain deductible expenses through the Paycheck Protection Program (PPP).

Per the IRS, “This notice provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.”1

Specifically, per the IRS, no deduction will be allowed for payroll costs; certain employee benefits related to healthcare; interest on mortgage obligations, rent, utilities; and certain interest on existing debts. The IRS’ rationale for disallowing these expenses, in connection with PPP loan forgiven amounts is to avoid a double-tax benefit, because the CARES Act specifically excluded from income any PPP loan forgiveness.

This federal tax treatment may not be necessarily the same for New Jersey income tax purposes or any other state.

We’ll continue to keep you updated as new guidance becomes available. Please reach out to Cg with questions or for more information.

1. Notice 2020-32.