Paycheck Protection Program: Guidance on Deductibility of Business Expenses Incurred

By Scott Zickefoose, CPA, CM&AA, Transaction Advisory & Tax Partner

Paycheck Protection Program: Guidance on Deductibility of Business Expenses Incurred

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.

Disclaimer:  This content has been prepared for general guidance and informational purposes only based on the date published.
The FFCRA, CARES Act, and SBA Paycheck Protection Program (PPP) are continually releasing new guidance that may change the information provided within this content. Keiter recommends that you perform your own independent research and/or speak with a qualified accounting professional before making any financial business decisions. © 2021 Keiter, All Rights Reserved.

Additional Resources

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About the Author

Scott Zickefoose

Scott Zickefoose, CPA, CM&AA, Transaction Advisory & Tax Partner

Scott works closely with his clients to identify tax planning and savings opportunities.

Scott is a member of Keiter’s Emerging and Growth Business team, where he consults with early stage business owners on relevant financial and tax matters, and is a member of the Merger and Acquisition team, where he specializes in providing sell-side and buy-side quality of earnings services. He is also a member of Keiter Advisors, Keiter’s full-service transaction advisory group serving lower middle market companies and their owners.

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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.


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