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EXPENSES PAID WITH FORGIVEN PAYMENT PROTECTION PLAN (PPP) LOAN PROCEEDS ARE NOT DEDUCTIBLE

By Charles D. Pulman on May 1, 2020

The CARES ACT added the Paycheck Protection Plan program, which provides for a loan on favorable terms to qualifying small businesses to pay permitted expenses. These expenses are limited to payroll costs, mortgage interest, rent and utilities --all as defined in the statute and in SBA Guidance and FAQs.

The most favorable term of the PPP loan is that repayment of the PPP loan is forgiven to the extent of PPP loan proceeds that are used to pay permitted expenses incurred and paid during the eight-week period beginning with the date the PPP loan proceeds are advanced to the borrower. In other words, the borrower is not required to repay the principal and accrued interest on the PPP loan to the extent the loan proceeds are used to pay these permitted expenses during the required time period. In addition, the statute provides that the forgiven loan is not income to the borrower.

Thus, the PPP program not only cancels the repayment of the PPP loan but also provides that the forgiven debt is not income to the borrower. A real double benefit.

The unanswered question, however, was whether the expenses paid with the forgiven PPP loan proceeds can be deducted for federal income tax purposes. That question has now been answered by the IRS.

At the end of April 2020, the IRS issued Notice 2020-32 stating that the otherwise deductible expenses paid with the forgiven PPP loan proceeds are not deductible for federal income tax proceeds. The IRS, in this Notice, set forth its analysis which is based on Section 265 of the Internal Revenue Code.

Borrowers receiving PPP loans that are forgiven will need to plan their 2020 tax calculations accordingly.

Any questions regarding the CARES ACT or the Paycheck Protection Plan Program can be directed to Charles Pulman by email at cpulman@meadowscollier.com or by phone at (214)749-2447.