Tax Treatment of CARES Act – PPP Loan Forgiveness

May 1, 2020

In Notice 2020-32 , https://www.irs.gov/pub/irs-drop/n-20-32.pdf (released April 30, 2020), the IRS says that any expenses (payroll costs, health care costs, utilities, rent, and mortgage interest) used to justify PPP loan forgiveness are NOT deductible.  This is the correct result under current law.  The debt forgiveness under the PPP loan program is treated as tax-exempt income and therefore any expenses associated with that tax-exempt income are not deductible.  Code Section 265(a); 26 C.F.R. Sec. 1.265-1.

Example

You borrowed $10,000 under the PPP loan program through the Small Business Administration.   This summer, your lender approves loan forgiveness for the $10,000 loan because you spent $7,500 on payroll costs and $2,500 on utilities, rent, and mortgage interest.   Under the CARES Act, the $10,000 in loan forgiveness is not treated as taxable income.   Under the IRS Notice, the $7,500 in payroll costs and $2,500 in other expenses are treated as directly associated with the tax-exempt income.  Therefore, no tax deduction is allowed for those $10,000 in expenses.  With $0 in income and $0 in allowed expenses, the $10,000 PPP loan is a “wash” for income tax purposes.

Comment

There will be some pressure to change this result in future stimulus bills (and Congress has granted similar relief in the past for clergy and soldiers), but passage of such a change will be difficult.

For questions regarding this subject, please contact S. John Kelly at jkelly@smgglaw.com.