IRS doubles down on nondeductibility of PPP-funded expenses

In guidance issued late on Wednesday, the IRS reiterated its position that taxpayers cannot claim a deduction for any otherwise deductible expense if the payment of the expense results in forgiveness of a Paycheck Protection Program (PPP) loan because the income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The guidance came in the form of a revenue ruling (Rev. Rul. 2020-27), which addresses the issue of borrowers who pay expenses in 2020 but whose PPP loan is not forgiven until 2021, and a revenue procedure (Rev. Proc. 2020-51) that provides a safe harbor for PPP borrowers that have their loan forgiveness denied or who choose not to request loan forgiveness.

Under Section 1106(b) of the CARES Act, an eligible recipient of a covered PPP loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the covered period beginning on the covered loan’s origination date: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation; (3) any payment on any covered rent obligation; and (4) any covered utility payment. Section 1106(i) excludes from gross income any amount forgiven under the PPP.

In May, the IRS issued Notice 2020-32, providing that a taxpayer that receives a loan through the PPP is not permitted to deduct expenses that are normally deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act.

The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible CARES Act Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven. The AICPA believes that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent.