The IRS issued Notice 2020-32 (text available here) explaining that otherwise deductible business expenses paid for with the proceeds of a forgiven PPP loan are not deductible for federal income tax purposes. This means that when a taxpayer pays eligible costs with a PPP loan (payroll, rent, mortgage interest, utilities, or certain other interest), if the PPP loan is forgiven, none of those expenses will be deductible.

Both Senator Grassley, the Senate Finance Committee Chair, and Representative Neal, the Chair of the House Ways and Means Committee expressed their dissatisfaction with this Notice. Representative Neal stated an intention to reverse this result in future legislation.