The IRS announced Notice 2020-32 and clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan pursuant to the CARES Act. The income associated with the forgiveness of the PPP loan is excluded from gross income pursuant to 1106(i) of the CARES Act.
The Paycheck Protection Program was established by Section 1102 of the CARES Act. A recipient of a covered loan may use the proceeds to pay payroll costs, employee benefits related to healthcare, interest on mortgage obligations, rent, utilities and interest on existing debt.
A recipient of a PPP loan can receive loan forgiveness on the indebtedness for payments made during the 8-week covered period beginning on the PPP loan origination date subject to restrictions such as maintaining the level of full-time employees and maintaining salaries and wages above a threshold. A PPP loan should be used for a minimum of 75% for payroll related costs and 25% or less is reserved for other qualified costs such as rent, utilities and interest.
In order to prevent a double tax benefit, the IRS clarified that PPP loan proceeds used to pay for eligible expenses cannot be deducted for Federal tax purposes if the loan is subsequently forgiven under Section 1106(i) of the CARES Act.
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