IRS Continues To Disallow Deductions For PPP Loans; Congress Pushes Back

The IRS reaffirmed its position last week indicating that employer expenses paid from Paycheck Protection Program (PPP) loan proceeds do not qualify as deductible expenses if the loan is forgiven.

PPP loan forgiveness applies to payments of payroll, certain mortgage interest and rent, and utility costs incurred. Ordinarily these expenses are deductible.

However, the IRS guidance will disallow the deduction if the expense originated from the proceeds of a forgiven PPP loan.

There is no language in the CARES Act that specifically supports the IRS position on non-deductibility. However, Section 1106(i) provides that any amount from PPP loan forgiveness that would ordinarily be includible in a taxpayer’s gross income – is excluded.

The IRS concluded that this language means expenses paid to qualify for loan forgiveness under a PPP loan are considered tax-exempt income and non-deductible under the Internal Revenue Code (IRC).

Generally, the IRC prevents taxpayers from “double dipping” by taking a deduction for expenses incurred to generate tax-exempt income, specifically providing that taxpayers may not deduct amounts that are allocable to tax-exempt income.

Congress is already pushing back against the IRS guidance. Congress’s top tax writers; Senate Finance Chairman Chuck Grassley (R-IA) and House Ways and Means Chairman Richard Neal (D-MA), urged the Treasury department to reconsider the IRS guidance.

Lawmakers have also introduced legislation clarifying that businesses may deduct expenses paid with forgiven PPP loans and are pressing that it be included in a COVID-19 relief package.

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