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Expenses Paid With Paycheck Protection Program (PPP) Deemed Nondeductible By IRS

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Within IRS Notice 2020-32, the Internal Revenue Service has responded to an important, previously unanswered question related to the PPP loan program – and taxpayers won’t like the answer.

The IRS has directed that expenses paid with PPP funds that are forgiven by the SBA will be nondeductible when computing Federal taxable income. It is important to note that while this directive is unfavorable to taxpayers, it does not mean that the forgiveness of the loan itself is taxable. The bottom line: while the amount of loan forgiveness will not be taxable, expenses paid with forgiven funds will not be deductible. Taxpayers will not receive the added benefit of deductible expenses along with their tax-free PPP income.

Expense deductibility of PPP forgiveness was not addressed explicitly in the CARES Act. While the IRS has the authority to limit these otherwise deductible expenses under existing law, this does not seem to reflect Congressional intent. Some members of Congress are currently working to change the law to allow for these expenses to be deductible. Berntson Porter is closely monitoring the situation and will keep you informed as it develops.

Berntson Porter is here to help you navigate these unprecedented times. Visit our online Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.