May 5, 2020

New Developments Around the Paycheck Protection Program: The IRS Makes Deductions Decision


The Paycheck Protection Program (PPP), a Small Business Administration loan intended to help businesses keep their workforce employed during the COVID-19 crisis, may actually provide fewer benefits than originally assumed. As April came to a close last week, the IRS quietly announced that there will be no tax deductions for business expenses paid with PPP funds, effectively making the loan proceeds taxable. Per IRS Notice 2020-32 issued on April 30th, loan proceeds forgiven will be considered a “class of exempt income” under Internal Revenue Code (IRC) Section 265. Therefore, business expenses reimbursed by PPP loans during the covered period (8-weeks beginning on the loan’s origination date) are not tax deductible by the borrower. In summary, the IRS notice states that allowing both forgiveness of the PPP loan and a deduction for those underlying expenses results in a double deduction. Thus, borrowers cannot claim tax deductions on loaned PPP money used to cover ongoing business expenses such as payroll, rent, utilities, etc.


Many find the IRS’ decision to be unacceptable, including Senator Chuck Grassley, R-Iowa, who has publicly expressed his disappointment stating, “The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible. This notice is contrary to that intent.” Senator Grassley is not the only one to oppose the recent IRS notice, as many heads of congressional tax committees believe the expenses funded with small business loans should be tax deductible. Chairman of the House Committee on Ways & Means Richard E. Neil, D-Mass., has stated, “We are planning to fix this in the next response legislation.”

We hope this important update has proven helpful. The Maddox Thomson & Associates team will continue to monitor the situation closely and will provide updates, as needed. Should you wish to discuss these matters at further length, please feel free to reach out to us. We are happy to provide guidance and support during this challenging time.