IRS Disallows Deductions for PPP Loans; Congress Pushes Back

The IRS issued guidance last week indicating that employer expenses paid from Paycheck Protection Program loan proceeds do not qualify as deductible expenses if the loan is forgiven.

This is unwelcome news for petroleum marketers who are set to lose up to eight weeks of expense deductions for which they would otherwise qualify.

Under Section 1106(b) of the CARES Act, PPP loan forgiveness applies to payments of payroll, certain mortgage interest and rent, and utility costs incurred during an eight-week period beginning on the date of the origination of the loan.

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.

Three of Congress’s top tax writers; U.S. Senate Finance Chairman Chuck Grassley (R-IA), Senate Finance Ranking Member Ron Wyden (D-OR) and House Ways and Means Chairman Richard Neal (D-MA) urged the Treasury department to reconsider the IRS guidance.

In a letter to Treasury Secretary Stephen Mnuchin they said if Congress intended PPP loans to be tax-exempt income, a provision that makes the forgiveness tax exempt would not have been included.

Grassley, Wyden and other senators have introduced legislation, clarifying that businesses may deduct expenses paid with forgiven PPP loans. Similar legislation is also expected to be introduced in the House on Friday by Representative Lizzie Fletcher (D-TX).

PMAA signed on to a letter to Senate Finance Committee Chairman Charles Grassley (R-IA) and House Ways and Means Committee Chairman Richard Neal (D-MA) in support of their efforts to ensure that loan forgiveness under the Payroll Protection Program (PPP) is tax free, as intended by Congress.

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