PPP Update: IRS Provides Guidance Regarding the Tax Deductibility of Expenses Paid with PPP Funds

On April 30, 2020, the Internal Revenue Service (IRS) released Notice 2020-32, providing clarity surrounding the federal tax implications of funds received under the Paycheck Protection Program (PPP).  Specifically, the IRS has confirmed that federal tax deductions are disallowed in situations where the expenses are paid for with forgiven funds received under Section 1106 of the CARES Act.

Prior to the issuance of this notice, taxpayers had questioned whether the ordinary and necessary trade or business expenses paid and incurred during the 8-week loan forgiveness covered period would also give rise to a tax deduction.  In issuing this clarification, the IRS has cited Internal Revenue Code (IRC) Sec. 265, which disallows expenses related to tax-exempt income.

While we await further guidance from the state and local taxing jurisdictions in terms of the taxability of these funds, this release provides welcome transparency for taxpayers looking to determine the tax impact of the forgiven funds.

Tune into our webinar on Thursday, May 7th at 10AM for additional information on this topic.  Register for this webinar here.

Sax will continue to update you as further details are made available.  Reach out to your Sax advisor or email [email protected] with questions.  For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.

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