Can I Take a Tax Deduction for Forgiven PPP Loan Expenses?

The Paycheck Protection Program (PPP) allows for the forgiveness of the PPP loan when the loan is used for clearly delineated purposes. Further, the forgiveness of this loan has been understood to be a non-taxable event, meaning the amount of the loan forgiven is not considered taxable income. However, what has not been clear is how a business should report on its 2020 tax return the expenses that have been paid with loan proceeds that have been forgiven.

The IRS recently published Notice 2020-32, which resolves this matter. Any payroll expenses, rent, mortgage interest, or utilities that are paid with the PPP loan and are subsequently forgiven will not be considered deductible business expenses on the 2020 tax return.

What this means is that, while the loan may be forgiven tax free, there will still be taxable ramifications when you file your 2020 tax return. Because the forgiven expenses cannot be used to offset revenue, taxable income will prove higher than normal, all other things being equal. This concern can be moderated slightly by the fact that revenues for most businesses will decrease during 2020, but the non-deductibility of these expenses remains an important point as you maintain your records throughout the year and have discussions with your CPA for year-end tax planning.

We have also been asked if rent expense might include equipment rental expense in addition to space rental expense. Unfortunately, there has been no direction given regarding this item, but stay tuned as we learn more from the IRS.

This information is current to the best of our knowledge as of May 4, 2020 and we will continue to review all updates and changes as they are released in order to put out the most up-to-date information.

Please feel free to reach out at any point if you have received a PPP loan and would like to discuss this further with us. We're happy to help!