Earlier this year, in IRS Notice 2020-32, the IRS took the position that business expenses paid with forgiven PPP loans are not deductible. This flys in the face of the language in the CARES Act that designates the PPP loan funds as tax exempt and negates congressional intent to make these forgivable loans tax free.
The IRS has recently issued new guidance (Rev Proc 2020-51 and Rev Rul 2020-27) “clarifying” the non-deductibility of expenses paid with forgivable PPP loan funds. Both of these pronouncements take the position that expenses paid in 2020 from PPP loans that have not been forgiven in 2020 are not deductible if forgiveness is expected in 2021.
Chuck Grassley (R), chairman of the Senate Finance Committee, and Ron Wyden (D), ranking member of Senator Grassley’s committee disagree with the IRS’s position on non-deductibility. They berated the IRS’s position on this issue in a joint statement issued last week.. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash ow, not more strains on it.”
This is a rare area of agreement between Republicans and Democrats. We are anticipating legislation setting the IRS on the correct, deductible, path Congress intended when the CARES Act was enacted.
Mark S Gleason CPA