May 1, 2020
Under the Paycheck Protection Program (PPP) provisions of the CARES Act, borrowers that pay certain covered expenses (payroll costs, benefits, rent, interest, and utilities) with PPP funds may have some or all of the loan forgiven. The CARES Act specifically states that amounts forgiven shall be excluded from the borrower’s taxable income.
Late yesterday, the IRS issued Notice 2020-32, stating that otherwise deductible expenses paid with PPP funds and forgiven may not be deducted for federal income tax purposes. Prior to this guidance, it was unclear whether borrowers would be able to exclude forgiven loan amounts from taxable income and deduct covered expenses as ordinary and necessary trade or business expenses. In Notice 2020-32, the IRS applied Section 265(a) of the Internal Revenue Code (IRC), which disallows a deduction for amounts that are otherwise deductible if the amounts are allocable to one or more classes of tax-exempt income. The IRS concluded that the CARES Act exclusion from income for forgiven PPP loan amounts results in a “class of exempt income” under the federal tax laws and regulations and are thus disallowed under IRC Section 265(a).
This guidance impacts tax planning for PPP loan borrowers, as well as the overall value of the PPP loan forgiveness program. We are updating our estimated forgiveness calculator to consider the tax impact and will notify you as soon as the updated version is released.
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