October 17, 2021

Volume XI, Number 290

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October 15, 2021

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COVID-19: Expenses Paid with PPP Loans Are Not Tax-Deductible

Late on April 30, 2020 the IRS provided rather unwelcome guidance to Paycheck Protection Program (PPP) loan borrowers and potential borrowers. IRS Notice 2020-32 provides that no deduction will be allowed for otherwise deductible expenses (e.g., wages, health insurance, rent, utilities) that are paid with PPP loans that are ultimately forgiven. 

Typically, if a loan is forgiven, the borrower benefiting from that forgiveness recognizes income equal to the forgiven amount. The CARES Act specifically provides that forgiven PPP loans will not result in taxable income to the borrower.

Since the Paycheck Protection Program was created, however, practitioners have debated whether expenses paid by loans that are forgiven on a tax-free basis, and whether loan recipients can also deduct the expenses paid via those forgiven loans. On one side of the debate were those who argued, correctly, that traditional tax principles would deny those deductions, specifically Section 265 of the Internal Revenue Code. The other side of the debate reasoned that the PPP is a remarkably untraditional program for an unprecedented situation; if Congress wanted to give with one hand (SBA) and take with the other (IRS) it would have said so. To the vast majority of borrowers, the economic impact of denying deductions may be largely the same as the economic impact of treating the forgiven loan as taxable.

For now, the IRS is on the side of the traditionalists. 

©2021 Pierce Atwood LLP. All rights reserved.National Law Review, Volume X, Number 122
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About this Author

Robert Ravenelle, Pierce Atwood Law Firm, Portland, Tax Law Attorney
Partner

As head of Pierce Atwood's Federal Income Tax practice, Rob Ravenelle has extensive experience in the planning, negotiation and tax structuring for mergers and acquisitions. He works closely with members of our Business Practice Group to ensure that clients obtain the most economic and tax efficient transaction results possible. Rob's prior experience practicing as a Certified Public Accountant brings unique skills that enhance the value of our services in deal transactions, from mergers to renewable energy tax equity financing to succession planning of closely held...

207-791-1294
Kris J. Eimicke, tax lawyer, Pierce Atwood
Partner

Kris Eimicke concentrates his practice on tax issues and economic development programs, with a special emphasis on state and federal new markets tax credit (NMTC) programs, renewable energy tax credits, historic rehabilitation tax credits, and the newly created opportunity zone program. Kris also regularly advises businesses, tax-exempt organizations, and individuals on tax issues related to a variety of business transactions, as well as representation before the Internal Revenue Service, state revenue agencies, and the courts on tax matters. 

(207) 791-1248
Christopher E. Howard Corporate Finance Attorney Pierce Atwood Law Firm Portland Maine
Partner

Chris Howard has a unique combination of technical legal skills and hands-on business and finance experience, enabling him to integrate these disciplines into strategies that match client objectives and provide clients with a competitive advantage. His forte is in managing complex commercial transactions and development projects in time-sensitive environments, and in accessing all sectors of the capital markets.

Chris' practice has four areas of focus:

  • Corporate finance and transactional representation...

(207) 791-1335
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