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Internal Revenue Service denies Tax Deduction tied to Small Biz Loans

May 5, 2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides support to small businesses through the Paycheck Protection Program (“PPP”) by providing companies with funds to pay up to eight weeks of payroll costs, plus benefits. Small businesses can also make use of PPP funds to pay interest on mortgages, rent and utilities. The CARES Act establishes that small business borrowers, who pay certain qualified expenses, could have a little or all of the PPP loan forgiven and that the forgiven amount would be excluded from taxable income.

However, the Internal Revenue Service (“IRS”) released guidance saying this situation – nontaxable government money utilized to pay business deductions – creates an additional tax benefit beyond the PPP funds received. The IRS makes clear that taxpayers who obtain a loan through the PPP are NOT permitted to deduct expenses that are ordinarily deductible under the Internal Revenue Code, to the extent the expenses were reimbursed by a PPP loan that was ultimately forgiven. This notice from the IRS establishes that the purpose of Section 265 of the Internal Revenue Code, is to avoid a double benefit by preventing a deduction for excluded income.

The IRS’s guidance, found in Notice 2020-32, will likely surprise taxpayers who believed PPP-related expenses were deductible. It is expected that a legislative explanation from Congress is needed to determine whether the intent of the CARES Act was to allow businesses to deduct all of their ordinary and necessary expenses, including those expenses used in determining PPP covered costs.  Some resistance to the IRS’ treatment of these funds is also expected, we will provide feedback on this as more information becomes available.

 If you are a small business owner and would like to discuss your options relating to the PPP and IRS Notice 2020-32, please contact HoganWillig Attorneys at Law at (716) 636-7600.

DISCLAIMER: This article has been published as a service to the general public, and, as such, is intended for general purposes only. The information contained within this article should not be considered and/or construed as legal advice. Each reader is advised to consult legal counsel to determine how the contents of this article may apply to their particular facts and circumstances. 

For changing and up-to-date legal information, visit our COVID-19 Resource Center. 

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