PPP Tax Deduction Update

Please note, this blog is current to the date of its publication, Friday, May 1. For additional updates or assistance navigating these uncertain times, please contact us or visit our SST COVID-19 resource page.

The Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief and Economic Security (CARES) Act, provides loans to small businesses to help cover payroll costs, rent obligations, employee benefits and more. Under section 1106(b) of the Act, recipients can receive loan forgiveness if funds are utilized appropriately. However, the Internal Revenue Service (IRS) recently published a clarification regarding PPP loan deductions, which we have expanded on below.

Notice 2020-32 clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment results in forgiveness of a PPP loan and the income associated with the forgiveness is excluded from gross income for federal income tax purposes.

Further, the IRS has put into effect Section 265(a)(1) of the code, which applies to otherwise deductible expenses incurred for the purpose of earning or otherwise producing tax-exempt income. The code also applies to tax exempt income earmarked for a specific purpose where deductions are incurred in executing said purpose.

Additional updates and clarifications from the IRS are likely to be shared in the coming weeks. COVID-19 assistance programs like the PPP are comprehensive and can be complex to navigate, but SST is here to help. We’re closely monitoring any updates and encourage you to contact us with any questions or concerns.

Thanks to Gold Gerstein Group LLC for providing the content for this blog post.