On April 30, 2020, the IRS released a notice (2020-32) that clarified the deductibility of certain expenses for loan recipients under the Paycheck Protection Program. Specifically, the IRS states that paid expenses, that would otherwise be deductible, will be disallowed to the extent of the forgiven loan amount.
Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Paycheck Protection Program loan recipients are eligible for loan forgiveness equal to the amount of certain expenses that are incurred and paid within the specified 8-week period which include:
1. Payroll costs
2. Interest on mortgage obligations
In general, a loan recipient will qualify for loan forgiveness if the proceeds are used for these expenses with no more than 25 percent used for the non-payroll costs. Loan forgiveness is reduced if there is a reduction in the number of employees or if there is a reduction of greater than 25 percent in wages paid to employees.
While the CARES Act stated that loan forgiveness would be excluded from the recipient’s gross income, it was silent as to the deductibility of expenses that would subsequently lead to loan forgiveness. By issuing this notice, the IRS has made clear their position that in order to prevent a double tax benefit, the associated expenses will be disallowed. This position is supported by statute and the general rule that deductions that are allocable to tax-exempt income are generally not deductible.
However, it is not clear if this was Congress’ intent when they drafted the CARES Act and it remains to be seen if they will try to draft new legislation that would allow the Paycheck Protection Program expenses to be deducted.
[November 18, 2020 Update: Nondeductibility of PPP Related Expenses]
As always, Lanigan Ryan will continue to monitor this evolving situation and add updates to our new COVID-19 resource center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan Ryan team members are always available for questions.