ATA Supports Senate Bill 3612

Notice to PPP Recipients: Business Expenses Paid with PPP Funds May Not Be Deductible

The IRS has issued Notice 2020-32 to provide guidance on the deductibility of business expenses for income tax purposes with respect to expenses that are paid by a covered loan under the Paycheck Protection Program (PPP). The Notice clarifies that, since the amount of a PPP loan that is forgiven is nontaxable income, under section 265 (a)(1) of the Internal Revenue Code, otherwise allowable deductions are not allowed if the deduction is allocable to tax-exempt income (i.e., prevents a double tax benefit).

Normally, forgiven debt results in taxable income as the release from repayment of a legally binding debt obligation results in a financial benefit that should be taxed. The Notice cites existing case law, and the lack of provisions to the contrary in the CARES Act, to justify its guidance.

While it’s logical that the IRS would not grant a dual benefit (i.e., nontaxable income and tax-deductible expenses), some members of Congress disapprove of the IRS’s decision. Senator John Cornyn has sponsored the Small Business Expense Protection Act, which would clarify that business expenses paid with forgiven PPP loans would be tax-deductible.

ATA members who have received PPP funds should keep careful track of the uses for which such funds are used. Even if the proposed relief is approved by Congress, recipients must be able to demonstrate to the Small Business Association (SBA) that the loan proceeds were used for covered expenses during the covered period. (There is also discussion in Congress about amending this provision of the CARES Act by extending the covered period and/or revising the SBA rule on the proportion of the loan proceeds that must be used for payroll (which is not in the CARES Act).

ATA members are encouraged to contact their congressional representatives and senators in support of the Small Business Expense Protection Act.

Ted R. Wozniak
ATA President

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