The CARES Act provided that to the extent a Paycheck Protection Program (PPP) loan is forgiven, that forgiveness would be excluded from gross income, and thus tax-free. However, the CARES Act did not address whether there would be any effect of such forgiveness on deductions related to the loan, including payroll costs, and rent, among others. In Notice 2020-32, the IRS announced that no tax deduction would be allowed for an expense that is otherwise deductible if the expense is part of the loan forgiveness provided in the CARES Act, and the income associated with the forgiveness is excluded from gross income.
This is a significant development as this result was not expected by many based on the tax-free characterization of the forgiveness program. However, if it was the intent of Congress that the loan forgiveness be a tax-free subsidy, additional legislation would be required to change this treatment.
For more information on PPP and the CARES Act including business continuity and industry-specific information, visit the Elliott Davis COVID-19 Resource Center.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.