On April 30, 2020, the IRS issued Notice 2020-32, to explain that a Paycheck Protection Program (PPP) loan recipient cannot deduct expenses that are normally deductible under the Internal Revenue Code (IRC), to the extent the expenses were reimbursed by a PPP loan that was then forgiven. The PPP was created by the CARES Act (see related posts below).
Under the CARES Act, forgiveness of indebtedness on the loan can be accomplished if the funds are used for eligible expenses during the eight-week covered period beginning on the covered loan’s origination date. Eligible expenses include: payroll costs; any payment of interest on any covered mortgage obligation; any payment on any covered rent obligation; and any covered utility payment. The CARES Act excludes from gross income any amount forgiven under the PPP.
The recent IRS guidance clarifies that, although the expenses paid by the PPP may be otherwise deductible as trade or business expenses or interest under the IRC, another section of the Code, which is intended to prevent a double tax benefit, disallows deductions for excluded income. Taxpayers are not permitted to “double-dip” by claiming an additional tax break on money received through this program designed to provide economic assistance.