COVID-19 And CARES Act: PPP Loan Forgiveness Expenses Are Not Tax Deductible. Wait! Really?

Obermayer Rebmann Maxwell & Hippel LLP
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Obermayer Rebmann Maxwell & Hippel LLP

The IRS recently announced that business expenses paid to qualify for loan forgiveness under the Paycheck Protection Program of the CARES Act (PPP) are not deductible. For details about the PPP please click here. This agency decision “prevents a double tax benefit” since loans forgiven under the program are not included in the borrower’s taxable income. By taking this position, the IRS eliminated some extra benefits borrowers would have received under a program that was intended to help small business maintain liquidity during the COVID-19 pandemic.

There are valid arguments for both sides. But because the CARES Act was silent on the deductibility of the business expenses the IRS expectedly took the more conservative position. Now it is up to the lawmakers to correct this issue if they disagree with the IRS’ position.

There is already some indication that the lawmakers will override the IRS’ position. The House Ways and Means Committee Chair, Richard Neal (D-Mass.) indicated through his spokesperson that there are plans to correct this deductibility issue in the next legislation. In addition, the Senate Finance Committee Chairman, Chuck Grassley (R-Iowa), expressed his disappointment with the IRS’ position. Any change in the law will likely be included in the next stimulus package.

So, the issue is not entirely settled. However, until lawmakers actually succeed in passing legislation that says otherwise, the IRS’ position will govern so that business expenses paid to qualify for loan forgiveness under the PPP will not be deductible.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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