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Guidance on Deductibility of Expenses Forgiven under the PPP

Tiffany L. Kuntemeier

May 01, 2020

On Thursday, April 30th, the IRS issued Notice 2020-32 providing guidance regarding the deductibility for Federal income tax purposes of expenses that ultimately get forgiven under the Paycheck Protection Program (PPP).  The CARES Act stated any amount that would typically be included in income for federal income tax purposes due to forgiveness, “shall be excluded from income.”  Expenses allowed to be paid for with PPP loan proceeds, and eligible for forgiveness include; payroll costs, payment of interest on mortgages, rent payments, and utilities.

In Notice 2020-32, the IRS addresses IRC Section 265, which is to prevent a double tax benefit; and outlines the definitions of Class of exempt income as “any class of income that is either wholly excluded from gross income under another provision of subtitle A of the Code, or wholly exempt from the taxes imposed by subtitle A of the Code under the provisions of any other law.”  Further, through a series of court case examples, the notice concludes that any amount of the PPP loan that is forgiven under the CARES Act section 1106(i), results in a Class of exempt income and is not allowed as a tax deduction.

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