Borrowers need to consider potential tax consequences that they otherwise may not be aware from forgiven loans obtained through the CARES Act’s Paycheck Protection Program (“PPP”). Borrowers flocked to this federal loan program to assist with business expenses such as payroll, utilities, mortgage interest, and rent with the promise that any loan amounts forgiven under the PPP would be tax free. Although the PPP specifically states that “any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness…shall be excluded from gross income,” the IRS announced that it will not allow the expenses paid with forgiven loan funds under the PPP to be used as a deduction against income.
On April 30, 2020, the IRS issued Notice 2020-32, which provides that:
“[T]his notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”
The IRS explained that section 265 of the Internal Revenue Code and section 1.265-1 of the Income Tax Regulations provides that no deduction is allowed to a taxpayer for any amount otherwise allowable that is allocable to income that is exempt from taxes. In addition, the IRS reasoned that its interpretation will “prevent a double tax benefit.”
To read the Notice issued by the IRS, click here.
Questions
Kronick attorneys across all of the firm’s practice groups – Public Agencies, Natural Resources, Labor & Employment, and Business/Healthcare – will continue to provide clients and the community with ongoing updates and advice regarding COVID-19 related issues as developments warrant. Please feel free to contact us for assistance with issues arising from the current health crisis.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502
Gabriel Herrera
gherrera@kmtg.com | 916.321.4334