IRS Denies Deductions for PPP Loans McDermott Will & Emery

The new IRS guidelines argue that taxpayers cannot deduct payroll, mortgage interest, rent, or utility expenses that were paid with the proceeds of the P3 loan. The guidelines also confirm that canceled PPP loans will not be included in a taxpayer’s gross income.

On April 30, 2020, the IRS issued Notice 2020-32 (Notice), stating that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in the cancellation of a loan. Paycheck Protection Program (PPP Loan) under Section 1106 (b) of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). Section 1106 (b) provides that the PPP loan forgiveness applies to payments of payroll, certain mortgage interest and rent, as well as utility costs incurred during an eight week period beginning in the date the loan was granted – all of which are expenses that taxpayers can otherwise deduct. The Notice also confirms that the income associated with such a rebate is excluded from the gross income of taxpayers.

Support for the IRS ‘non-deductibility position is not evident in the text of the CARES law itself and, as such, may surprise taxpayers. Section 1106 (i) of the CARES Act provides that any amount which (but for this paragraph) would be included in the gross income of a taxpayer as a result of the loan forgiveness described in Section 1106 (b ) “Will be excluded from gross income”. In the notice, the IRS interpreted this wording to mean that “any category of gross income that may arise” from a canceled PPP loan – whether that income is properly characterized as debt repayment or is otherwise included in gross income. – are excluded from the gross income of a beneficiary of a PPP loan.

However, the IRS noted that the CARES Act does not specify whether certain deductions for eligible PPP loan expenses are allowed when the PPP loan is subsequently canceled.

The IRS first addressed this issue in the notice, finding that expenses paid to qualify for a loan forgiveness under a PPP loan are chargeable to tax-exempt income and therefore not deductible. under Section 265 of the Internal Revenue Code.

Generally, Section 265 prevents taxpayers from “double deduction” by taking a deduction for expenses incurred to generate tax-exempt income, specifically providing that taxpayers cannot deduct amounts that are attributable to ” exempt income category ”. Applying this rule in the present context, the IRS concluded that to the extent that PPP loan amounts canceled under the CARES Act are excluded from a taxpayer’s gross income, these amounts constitute a category of exempt income. purposes of section 265. As a result, beneficiaries of PPP loans cannot deduct amounts attributable to such income.

What expenses are attributable to tax-exempt income? The notice considers that the deductions are attributable to the income exempt from tax (and therefore denied under section 265) if the deductions were “for the amount of any payment of an eligible expense under section 1106. to the extent of the resulting covered loan forgiveness (up to the total amount forgiven).

The IRS considers this conclusion to be consistent with previous guidance. The Opinion postulates that Section 265 applies when taxpayers receive tax-exempt income for a specific purpose – here, to fund payroll and other eligible costs – and incur deductions to achieve that purpose (for example, to pay labor costs). If so, the IRS says that “it should be concluded that some or all of the [such] deductions are made against tax-exempt income. The Notice cites an earlier IRS ruling (Rev. Rul. 83-3) for the proposition that deductions are chargeable to tax-exempt income when that income is earmarked for a specific purpose and deductions are made. to achieve this goal. The IRS argues that the “direct connection” between the amount of the PPP loan forgiveness and “an equivalent amount” of otherwise deductible payments made pursuant to Section 1106 expenses constitutes “a sufficient connection” to warrant the application of section 265 to prohibit deductions for such payments up to the amount of the canceled PPP loan.

The IRS decision received mixed reviews and elicited a swift, bipartisan response from senior members of Congress. It is possible that future legislation will overrule the IRS’s position and restore full deductibility of expenses paid with the proceeds of the PPP loan. In the meantime, taxpayers should know that the IRS is seeking to reclaim some of the key benefits of the CARES Act.

[View source.]

About Yvonne Lozier

Check Also

Colorado sues Pennsylvania company over student loans to public service workers – CBS Denver

DENVER (CBS4) – The Colorado attorney general’s office on Wednesday filed a lawsuit against a …

Leave a Reply

Your email address will not be published.