No Deduction for PPP Payments to the Extent that the Loan is Forgiven

May 4, 2020 by Ali Carbo
Tax Services

The IRS released guidance disallowing business deductions to the extent of eligible loan forgiveness under the Paychecks Protection Program (PPP).

The CARES Act created the Paychecks Protection Program to add liquidity to businesses by issuing forgivable loans through the Small Business Administration (SBA) for expenses such as payroll, employee benefits, rent, mortgage interest, and utilities.  The loans would be forgiven if the proceeds are used for qualifying expenses, such as payroll and employee benefits, within an 8-week period.

The IRS has clarified its position on the deductibility of eligible payments made with PPP loan proceeds.  Payments are non-deductible to the extent that those payments qualify the loan to be forgiven.  The Internal Revenue Code has a history of disallowing a double tax benefit, and in this case this position is consistent with existing tax law.   

Although loan forgiveness is specifically excluded from income tax within the CARES Act, it appears it will take an act of Congress to allow a deduction for the eligible PPP payments if the loan is forgiven.  Already some politicians have voiced their opposition to the IRS guidance and suggest it may be addressed in the next round of stimulus legislation.