Tax Monitor

One Big Question Answered – Unfortunately with a No.

May 1, 2020

By: Robert G. Tweel

The IRS released Notice 2020-32 addressing expenses paid with PPP loan proceeds which are subsequently forgiven. The CARES Act exempts the forgiveness of the PPP loan proceeds from federal taxable income. There had been some question as to whether the expenses paid which gave rise to the forgiveness would be allowable as deductions for federal income tax purposes. The question arose from IRC section 265 which provides that no deduction is allowable to a taxpayer for any amount that is allocable to one or more classes of income wholly exempt from federal income tax.

In its analysis of IRC section 265, the IRS determined that to the extent that the CARES Act operates to exclude from gross income the amount of a PPP loan forgiven under the CARES Act, such forgiveness and exclusion from federal income tax results in a class of exempt income under IRC section 265. Accordingly, no deduction is allowable for any expense otherwise deductible which is an eligible expense for forgiveness under the CARES Act and which gives rise to forgiveness of the PPP Loan principal.