September 20, 2020

Volume X, Number 264

September 18, 2020

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IRS to Disallow Deductions for Expenses Paid Using Forgiven PPP Loan Funds

In Notice 2020-32, the IRS answered one of the previously open questions for recipients of loans under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), namely whether businesses may deduct payroll costs and other eligible expenses funded with the proceeds of a PPP loan that is ultimately forgiven. To the detriment of struggling businesses, the IRS announced its position that such deductions are not allowed under existing federal income tax law.

Under the PPP, recipients of loans may obtain forgiveness of the loan to the extent the loan proceeds are used for payroll costs and other eligible expenses during the eight-week period after receipt of the proceeds. While the forgiveness of a loan generally results in a business realizing cancellation of indebtedness income under general tax principles, the CARES Act expressly provided that any such income realized as a result of forgiveness of the loan is excluded from the business’ income. As a result, businesses will not be hit with an unwelcome tax bill due to the SBA’s forgiving the PPP loan.

However, the question left unanswered by the CARES Act was whether businesses would be allowed to deduct the payroll costs and other eligible expenses they paid using PPP loan proceeds. Relying on regulations issued under Section 265 of the Internal Revenue Code and guidance that is almost 40 years old, the IRS concluded that permitting such a deduction would be a “double tax benefit,” allowing businesses to receive funds tax-free and deduct expenditures paid with those funds.

Despite the clear intent of the CARES Act to provide benefits to struggling businesses, the IRS’ current position is that permitting businesses to exclude PPP loan proceeds from income and deduct expenses funded with those proceeds would provide more benefit than was intended by the CARES Act.

© 2020 Jones Walker LLPNational Law Review, Volume X, Number 122


About this Author

Trevor Wilson Tax Attorney Jones Walker

Trevor Wilson is a partner in the firm's Tax & Estates Practice Group. Mr. Wilson practices in the areas of federal income taxation, business formation, tax-exempt organizations, executive compensation, estate planning and the administration of successions.

Mr. Wilson's federal income tax practice focuses on advising clients on structuring their U.S. and international business activities to minimize federal income taxation, both in the ordinary course of business operations and upon a sale or merger of the business. In addition, he advises clients on...

Gina M. Jacobs Corporate Attorney Jones Walker Jackson, MS

Gina Jacobs is a partner in the Corporate Practice Group. She focuses on business planning and commercial transactions, commercial finance, and mergers and acquisitions.

Over the course of a law career that spans more than 30 years, Gina has advised privately held businesses with their business planning, contracting, finance, and acquisition and divestiture needs. Her knowledge of contract and commercial law and finance makes her an asset to her clients as they grow and expand their businesses. She has provided counsel to companies in a diverse range of industries, including manufacturing, distribution, gaming, telecommunications, construction, and Native American tribes and enterprises.

Gina also represents borrowers and lenders in structuring and documenting credit facilities of all types. These include secured and unsecured term and revolving credit facilities for working capital, property and facility acquisition and development, construction, and equipment financing. She has dealt with all types of collateral from machinery and equipment, farm products, stock and LLC interest, deposit and securities accounts to legal fees and intellectual property rights. Gina also draws on her background in commercial and lending transactions to assist clients with strategies for collecting and maximizing recovery for troubled loans.

Curtis R. Hearn Securities Attorney Jones Walker Law Firm

Curt Hearn is the practice group leader of the Corporate & Securities Practice Group. He handles mergers, acquisitions, and divestitures, as well as capital raising transactions for a variety of publicly traded and privately held companies. Mr. Hearn represents private equity and venture capital firms, and focuses his practice on companies in the energy, energy service, healthcare, transportation, logistics, and manufacturing sectors. 

Mr. Hearn has more than twenty years of experience representing large bank holding companies in Louisiana....

Ruddy R. Ramelli Tax Attorney Jones Walker New Orleans, LA

Ruddy Ramelli is a partner in the Tax Practice Group.

Ruddy has been practicing tax law for more than 30 years and is a board-certified tax specialist as certified by the Louisiana Board of Legal Specialization. He focuses his practice on federal and state income tax issues and the tax structuring and consequences of mergers, acquisitions, and related transactions.

Ruddy regularly represents corporations, partnerships, individuals, and other for-profit entities, and has in-depth experience in the energy and real estate industries. He works regularly with...