IRS Guidance Prevents Double Tax Benefit for Forgiven Paycheck Protection Program Loans
On April 30, 2020, the IRS issued IRS Notice 2020-32 (IRS Notice), in which it concluded that no tax deduction is allowed for an expense to the extent that the payment of the expense results in forgiveness of a Paycheck Protection Program (PPP) loan and the income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Accordingly, the IRS' position as stated in the IRS Notice eliminates the prospect of a double tax benefit for a taxpayer seeking to exclude amounts of PPP loan forgiveness from taxable income and deduct expenses attributable to costs eligible for PPP loan forgiveness from taxable income.
Under the PPP, an eligible business may obtain a PPP loan from a participating bank lender which is guaranteed by the Small Business Administration. Further, under the CARES Act, an eligible business may obtain a PPP loan from a participating bank lender in order to pay for certain eligible costs including payroll costs, rent, utilities and certain interest on mortgages. Generally, any of these eligible costs paid by the business within the 8-week period after obtaining the PPP loan can be forgiven if the business meets certain guidelines. Under the CARES Act, businesses may exclude amounts of PPP loan forgiveness from taxable income.
Prior to the IRS Notice, given the limited guidance on PPP loan forgiveness tax issues, tax professionals and business owners were hopeful for and formulated legal arguments to support both a tax deduction and an exclusion from taxable income. However, the IRS Notice is a significant barrier established to prevent such a double tax benefit.
Frequently Asked Questions
In the year 2020, my business received a $1,000,000 PPP loan and during the following 8-week period, spent $1,000,000 on eligible payroll costs, rents, utilities and mortgage interest. The participating bank lender on the PPP loan has forgiven $1,000,000 of the $1,000,000 debt.
Can my business exclude the $1,000,000 of loan forgiveness from taxable income for the year 2020?
Yes. While under general federal income tax rules, the business has cancellation of indebtedness income (COD Income) of $1,000,000, under the CARES Act, that COD Income of $1,000,000 is not taxable.
Can my business also deduct the $1,000,000 of expenses in calculating taxable income for the year 2020?
The position of the IRS is “No.” While under general federal income tax rules, the $1,000,000 of expenses may be treated as deductible in calculating taxable income, under the IRS Notice, that $1,000,000 of expenses is treated as non-deductible to the extent that the corresponding $1,000,000 of loan forgiveness is excluded from taxable income under the CARES Act.
If only $800,000 of the $1,000,000 PPP loan is forgiven (because only $800,000 was used to pay eligible payroll costs, rents, utilities and mortgage interest), could my business deduct the remaining $200,000 of expenses in calculating taxable income for the year 2020?
Maybe. If the remaining $200,000 of expenses are otherwise deductible under general federal income tax rules, such expenses may be deductible in calculating taxable income for the year 2020.