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No Tax Deduction For Expenses Paid With Forgiven PPP Funds

While the IRS rules that otherwise deductible expenses are not deductible, Congress discusses a legislative fix.

The Internal Revenue Service (IRS)  has issued Notice 2020-32, 2020-21 I.R.B. 1 (the “Notice”) in which the IRS announced that taxpayers will not be able to take a federal income tax deduction for otherwise deductible expenses paid with Paycheck Protection Program (PPP) loan proceeds that are partially or completely forgiven and excluded from a taxpayer’s income.

Although Section 1106(i) of the CARES Act states that amounts that would otherwise be included in the gross income of a  borrower arising from the forgiveness of a loan received under the PPP are excluded from the income of the borrower for federal income tax purposes., prior to the release of IRS Notice 2020-32, it was unclear whether borrowers would also be able to deduct covered expenses as ordinary and necessary trade or business expenses.

In the meantime, Congress is considering legislation to reverse the IRS’s announced position. It is unclear when or if this may happen.  Pending a change, taxpayers receiving PPP loans will need to assume non-deductibility when modeling their post-tax cash flows and year-end tax planning.

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