IRS Notice 2020-32
Should Taxpayers Deduct Expenses Resulting in Loan Forgiveness under the Paycheck Protection Program Despite the Contrary Guidance of the Internal Revenue Service?
Takeaway: Although the Internal Revenue Service indicates that expenses resulting in loan forgiveness under the Paycheck Protection Program are not deductible, its interpretation is questionable. Even if Congress does not legislatively address this issue, businesses may consider deducting these expenses based on the intent of the statute, legal authorities and analyses supporting deductibility, and other business considerations.
On April 30, 2020, the Internal Revenue Service (“the Service”) released Notice 2020-32 (“the Notice”) regarding the deductibility of certain expenses relating to the Paycheck Protection Program (“PPP”). In particular, the Notice provides the Service’s position on the deductibility, for federal income tax purposes, of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives loan forgiveness pursuant to the Paycheck Protection Program. The Notice indicates that
no deduction is allowed if the expense results in forgiveness of a covered loan under the PPP and the income associated with the forgiveness is excluded from gross income pursuant to the CARES Act.
While taxpayers should carefully review this guidance, its application should be questioned in light of its (1) likely conflict with legislative intent and existing law, (2) little weight of authority, and (3) the inequitable results that this interpretation will inevitably produce. Businesses should consult with their advisors to understand potential planning opportunities and the risks associated with taking a position contrary to this Notice.
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