Thursday, April 30th, the IRS released guidance regarding the deductibility of expenses paid with PPP forgiven loan funds for Federal income tax purposes. The notice specifically clarified that no deduction is allowed under the Internal Revenue Code for any expense that is otherwise deductible if the payment of that expense results in forgiveness of a covered PPP loan and that the income associated with forgiveness is excluded from gross income.
In layman’s’ terms: The IRS told PPP loan recipients, “you can’t have your cake and eat it too.” Or as they mention in their notice, they want to prevent a taxpayer from obtaining a “double tax benefit” – which is the purpose of the already existing section 265 of the code ( to simply summarize, 265 provides that no deduction is allowed to a taxpayer for any amount otherwise allowable as a deduction when allocable to income wholly exempt from income tax).
Forbes writer Robert W. Wood wrote, “There have been debates about the tax deduction point, with some people saying you could still deduct the wages since the CARES Act did not seem to say otherwise. But under traditional tax principles, it seemed too good to be true that you could get the free money, not pay discharge of debt income, and still deduct the payments of wages and rent made with the free money. The IRS notice confirms that.” You can read that article here.
This IRS notice conveniently comes at a moment when the PPP loan program is facing significant scrutiny by the media and general public.
We intend on covering this topic in more detail during the upcoming webinar on Tuesday, May 5th which you can sign up for here. We will show you numerically what this all actually looks like and might mean to your business.
For more gory details and to read the full IRS notice, please click here.