IRS Releases Guidance on Non-Deductibility of PPP-Related Expenses

May 5, 2020

The IRS recently released guidance via Notice 2020-32 stating taxpayers that receive a loan through the PPP can’t deduct expenses that are normally deductible if those expenses were reimbursed by a PPP loan that was subsequently forgiven.

According to the IRS, Sec. 265(a)(1) prohibits an otherwise allowable deduction under any provision of the Code for the amount of any payment of an eligible Section 1106 expense to the extent of the resulting covered loan forgiveness because that payment is allocable to tax-exempt income. The IRS cites Rev. Rul. 83-3 for the proposition that deductions must be decreased to the extent the associated expense is allocable to amounts excludable from gross income.

The CARES Act does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses. The AICPA is seeking legislative clarification on the IRS guidance and believes the IRS’s interpretation denying deductions of expenses forgiven under the PPP is contrary to Congress’s intent.