IRS Issues Guidance on Deductibility of Business Expenses Paid by Payroll Payment Program Loans
Updated: May 4, 2020
By: Juliya L. Ismailov
While the CARES Act is clear on the income tax treatment of the forgiven portion of a Payroll Payment Program ("PPP") loan (discussed more fully in a prior article), at first it was not clear whether section 265 of the Internal Revenue Code applies to disallow deduction of business expenses paid from such forgiven funds. Section 265 prevents “double dipping” by disallowing deductions of business expenses paid using nontaxable income. While some have argued that Congress did not intend for section 265 to apply to disallow deductions for business expenses that a PPP loan is expressly intended to fund, and even that such disallowance would be fundamentally unfair, the IRS has now ruled on this issue against the employer-taxpayer. On April 30, it issued Notice 2020-32, which clarifies that no deduction is allowed "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)."