The IRS released a notice on April 30, 2020, stating that tax deductions for wages, mortgage interest, and rent paid with forgivable Paycheck Protection Program (PPP) loans are not permitted, viewing it as a “double-dipping” of tax benefits provided. Specifically, the notice clarified that no deduction is authorized under the Internal Revenue Code for an expense that is usually considered deductible if the payment of the expense results in forgiveness of a covered PPP loan.
PPP loans were created as part of the CARES Act as a response to the economic impacts of COVID-19 on the small businesses of America. An eligible recipient of a PPP loan can receive forgiveness of the loan in its entirety when the funds are used during the designated eight-week time period to cover payroll costs, mortgage and rent obligations, and utility payments. There is also no forgiveness of debt income when the PPP loan is forgiven, which is usually when loans are taxed as income. Typically when income is tax-exempt, you cannot also claim deductions relating to that tax-exempt income. That was the IRS’ conclusion in this notice – PPP funds (tax-exempt income) cannot generate associated tax deductions by using those funds.
One can argue, and plenty are, that Congressional intent was for these payroll and associated costs to be fully deductible in addition to the PPP loan funds to be tax-exempt. In non-pandemic times, businesses expect for wages, rent, mortgage interest, and utility payments to be fully deductible, so this announcement has muddied the waters for plenty. The CARES Act does not expressly provide language that does or does not support the continued use of deductions for these purposes in conjunction with PPP loans.
We anticipate there to be more opposition to this notice in the coming days and will update when and if any further official clarification guidance is issued from the IRS. For more information on PPP loans, including ways to maximize your PPP loan forgiveness, check out our continuously updated COVID-19 Resources hub. As always, your CRI tax advisors stand ready to support you as you navigate this often confusing and always dynamic situation for yourself and your business.