Notice 2020-32: Expenses Paid with PPP Loan Proceeds are Nondeductible
for Tax Purposes briefing by Ron Kuyath,CPA
As the Small Business Administration (SBA) and lenders across the country are processing a second wave of Paycheck Protection Program Loans (PPPL), the Internal Revenue Service (IRS) issued Notice 2020-32 yesterday to provide guidance and present their position regarding the deductibility of expenses paid with PPPL proceeds for eligible payroll costs, certain employee benefits related to healthcare, interest on mortgage obligations, rent, utilities and interest on other existing debt obligations.
The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) signed in March has language that specifically provides an exclusion from gross income for PPPL amounts forgiven under the program guidelines. (Section 1106(i) of the CARES ACT provides that, for purposes of the Code, any amount that (but for that subsection) would be includible in gross income of the recipient by reason of forgiveness described in Section 1106(b) “shall be excluded from gross income.”) Debt forgiveness is provided for loan proceeds used to pay the expenses listed above for an eight-week period following loan disbursement as long as various employment criteria are met. However, the CARES ACT contains NO related language with respect to the deductibility for income tax purposes of those expenses paid that make up the amount eventually forgiven under the provisions of the PPPL.
Practitioners quickly began talking and sharing thoughts on the deductibility of the expenses paid with PPPL proceeds that are considered ordinary and necessary trade or business expenses under Internal Revenue Code (IRC) Sections 162 and 163. The IRS position outlined in Notice 2020-32 relies on IRC Section 265(a)(1) and Treasury Regulations Section 1.265-1 that provide no deduction is allowed to a taxpayer for any amount otherwise allowable as a deduction to such taxpayer that is allocable to one or more classes of income, … wholly exempt from the taxes imposed by subtitle A of the Code. The purpose of Section 265 is to prevent a double tax benefit.
Notice 2020-32 cites eight existing cases to support their position as well as three 1980s Revenue Rulings using Section 265 to deny deductions for expenses associated with income excluded under any provisions of law.
Depending on a taxpayer’s year end, there may be timing issues that arise concerning the treatments of both the loan proceeds and expenses paid using the loan proceeds. Taxpayers may not know if the loan proceeds are forgiven and expenses are not deductible if the loan forgiveness process does not occur quickly.
If you are interested in reviewing a complete copy of Notice 2020-32, a link is provided below:
Please contact your BRC representative if you have any questions.