The Internal Revenue Service on April 30 issued guidance that states that employers who received loans through the Paycheck Protection Program (PPP) will not be eligible for tax deductions on expenses if payment of those expenses funded by the loan results in the loan being forgiven.
Specifically, IRS Notice 2020-32 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 pursuant to the PPP.
The notice clarifies that 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 the loan.
In general, the tax rules for a business-related loan are:
- Wages/health care/rent/utilities are a deductible expense
- Debt forgiven is taxable income
For businesses with a PPP loan that is forgiven, these rules generally reverse themselves:
- PPP debt forgiven is not taxable income
- Wages/health care/rent/utilities paid via the forgiven debt are not
For PPP loans forgiven pursuant to the CARES Act, the IRS will disallow any otherwise allowable deduction under any provision of the tax code to the extent of the resulting PPP loan forgiveness (up to the aggregate amount forgiven). In the view of the IRS, this treatment prevents a double tax benefit.
NAHB is providing this information for general information only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. Before making any decision or taking any action on this information, you should consult a qualified professional adviser to whom you have provided all of the facts applicable to your particular situation or question.