On April 30, the IRS issued Notice 2020-32, clarifying that no deduction is allowed under the Internal Revenue Code (IRC) for an expense payment which resulted from a Paycheck Protection Program (PPP) loan that was forgiven. To the extent that a portion of a PPP loan is forgiven, an equal portion of the expenses associated with the forgiveness are not deductible on your business return. Expenses that are eligible for forgiveness are largely payroll costs but also qualifying rent, mortgage interest and utility payments.
Treasury Secretary Steven Mnuchin said in an interview, “The money coming in the PPP is not taxable. So if the money that is coming is not taxable, you cannot double dip…You cannot say that you are going to get deductions for workers that you did not pay for.”
On May 5, Congressional leaders, headed by Chuck Grassley and Richard Neal, chairmen of the tax committees in the Senate and House, respectively, rejected the IRS’s position that PPP loan borrowers are not entitled to deductions stemming from PPP loan forgiveness. They stated that they “did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for the PPP loan.” They further stated that “Providing assistance to small business, only to disallow their business deductions as provided in Notice 2020-32, reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income.” Legislation has been introduced to the Senate to overrule IRS Notice 2020-32. The bill, called the Small Business Expenses Protection Act of 2020, S.3612, is supported by the AICPA.
For more details on the AICPA’s advocacy on this issue please go to the Journal of Accountancy article posted on May 6, “AICPA supports Bill that would make PPP funded expenses deductible” by Alistair M Nevius, J.D.
We will continue to keep you up-to-date. Should you have any questions, please don’t hesitate to reach out to your tonneson + co representative.