Expenses Paid With Forgiven Portion of PPP Loan Are Not Deductible

The Paycheck Protection Program (PPP) Loans have drawn all types of struggling businesses during this COVID-19 crisis. The primary draw was the added provision of 100% loan forgiveness. While the CARES Act presented a fairly straight forward new SBA loan program to help small businesses, we knew it wouldn’t that simple. At every twist and turn in the process, more layers of complexity were uncovered, resulting in a need for additional clarification and guidance.

One of the questions about the PPP was related to loan forgiveness. The CARES Act has always provided that the forgiven portion of the PPP would not be taxable.  (For more information on how to qualify for PPP loan forgiveness click here). The question that remained was whether businesses could still deduct the expenses (wages, rent, and utilities) paid with those funds. To be sure there would be no double tax benefit, the IRS issued Notice 2020-32 and confirmed that there is NO deduction for these expenses.

While this may disappoint some, it should be noted that it’s consistent with prior IRS guidance regarding expenses allocable to tax-exempt income. These types of expenses were not deductible before the CARES Act and they will not be under the Paycheck Protection Program.