Paycheck Protection Program: Guidance on Deductibility of Business Expenses Incurred

Paycheck Protection Program: Guidance on Deductibility of Business Expenses Incurred

Posted on

By Scott Zickefoose, Tax Senior Manager

IRS Notice 2020-32 provides guidance on allowable tax deductions relating to business expenses

On April 30, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-32. This notice provides guidance regarding the deductibility for Federal income tax purposes of expenses incurred in a taxpayer’s trade or business when the taxpayer receives a Paycheck Protection Program (“PPP”) loan.

This notice clarifies that no deduction is allowed under the Internal Revenue Code (“IRC”) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act.  This speaks to expenses categorized as “allowable uses” of PPP loan proceeds, as defined in the CARES Act, such as payroll costs, rent, utilities, and interest.

Has Your Business Received a PPP Loan?

IRS Notice 2020-32 and IRC Section 265 Prevent A Taxpayer Double Benefit

The IRS relies on IRC Section 265(a)(1) and Income Tax Regulation Section 1.265-1 to support that deductions (even if otherwise allowable) attributable to classes of tax exempt income cannot be deducted for income tax purposes.  The purpose of IRC Section 265, and this Notice, is to prevent a double benefit to taxpayers.

The CARES Act specifically provided for the loan forgiveness to be excluded from gross income for Federal income tax purposes and now Notice 2020-32 disallows expenses up to the amount of loan forgiveness (for Federal income tax purposes).  It is important to note that the treatment of the loan forgiveness and/or expenses disallowed under this Notice could vary for state income tax purposes.

Our team is closely monitoring the Paycheck Protection Program and the related IRS guidance. We will update you as new guidance is released. The definitive guidance is causing significant confusion among borrowers and their advisors. If you have questions about how these changes impact your business, please contact your Keiter advisor, Email | Call: 804.747.0000. We are here to listen and provide sound advice.

Additional Resources

COVID-19 Business Resource Library

About the Author

Scott Zickefoose works with both large and mid-market clients in the real estate, construction, and manufacturing industries, as well as with private equity firms and emerging businesses. He works closely with his clients to identify tax planning and savings opportunities.  His experience includes single and multi-state corporate and flow-through tax planning and compliance, corporate tax provisions (FAS 109 and FIN 48), and individual income taxation. Scott is a member of the Keiter Merger and Acquisition team and Future Leaders group.

More Insights from Scott Zickefoose, CPA, CM&AA

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


How Can We Help You and Your Business?

Innsbrook Corporate Center
4401 Dominion Boulevard
Glen Allen, Virginia 23060

804.747.0000 or 804.273.6200