IRS Issues Guidance Regarding Tax Deductions for PPP Loan Forgiveness
5/2/2020
The Paycheck Protection Program (PPP) has proved so popular that additional funds have been appropriated for it. The basics of the program are that a business receives a loan based on 2.5 months of prior year’s payroll, and if the business spends the money within eight weeks on certain expenses then the loan is forgiven.
Specifically, loan forgiveness is available under the program for the following expenses paid and incurred during the eight weeks after the borrower receives their funds:
• Payroll costs
• Mortgage interest
• Rent
• Utilities
The IRS has issued guidance under IRS Notice 2020-32 that states that taxpayers are not allowed to claim a deduction with exempt income. Because the PPP loan forgiveness is excludable from taxable income under the CARES Act and is therefore exempt income, taxpayers may not claim a deduction for those expenses paid with loan proceeds where the loan is forgiven.