Notes on the IRS Releases Notice 2020-32: Deductibility of Expenses When Loan is Forgiven Under Paycheck Protection Program (PPP)
The IRS released guidance indicating that no deduction is allowed for expenses that result in forgiveness of a PPP loan. This is not what was expected. The text of the law indicated that any forgiveness of the PPP loan was not taxable. The IRS agrees, but indicates that no deduction is allowed for expenses attributable to the debt that was forgiven. This ends up having the same result.
Based on the IRS notice, whatever amount of the PPP loan that is forgiven will increase the taxable income of the business. For example, if $100,000 PPP loan is forgiven, and you are paying tax at a marginal rate of 35%, your income tax liability will increase by $35,000 due to the disallowed expenses. What you really end up with is $65,000 of the loan was forgiven, and $35,000 was repaid through increased taxes.
We will continue to monitor the situation for new developments. Should any questions arise, please feel free to contact us here at Filipek & Company, or email us at firstname.lastname@example.org or call us at 866-931-0224