May 05, 2020


After weeks of debate as to whether Paycheck Protection Program (“PPP”) loan proceeds used to fund ordinary business expenses that could typically be deducted could still be written off if paid with forgiven PPP loan proceeds, the IRS has provided guidance. On April 30, 2020, the IRS issued Notice 2020-32 and has concluded that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the income associated with the forgiveness is excluded from income.

A covered loan recipient's debt on the loan generally can be forgiven in an amount equal to the sum of payments made for the following expenses: payroll costs; any payment of interest on any covered mortgage; any payment on any covered rent obligations; and any covered utility payment. Given the IRS's position in Notice 2020-32, these expenses that must be paid in order to achieve forgiveness are not deductible. This comes as a surprise to many businesses that factored in the tax deductions as part of the decision to apply for a PPP loan.

Members of Congress were quick to share their disappointment with the IRS guidance. Senate Finance Committee Chair Chuck Grassley, R-Iowa, noted that, "The intent of Congress was to maximize small businesses' ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible….This notice is contrary to that intent". Erin Hatch, spokesperson for the House Ways and Means Committee Chair Richard E. Neal, D-Mass, has stated "We are planning to fix this in the next response legislation".

Given the apparent bi-partisan support for a legislative "fix", we are cautiously optimistic that Congress will resolve this issue favorably for the business community.

Please contact your Woods Oviatt attorney or the attorneys listed in our COVID-19 resource group regarding this or any COVID-19 related issues.

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