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Are expenses paid with PPP loan proceeds tax deductible?

Many businesses across the country have applied for and/or received PPP loans. Such loans have provisions for "forgiveness” in whole/part to the extent loan proceeds are used for payroll costs, rent, utilities and mortgage interest during an eight-week period from the date the loan proceeds are received. In addition, businesses have to meet certain employee headcount/retention requirements. The portion of any loan forgiven is not taxable income, at least under federal tax law. The open question was whether the business expenses paid with the loan forgiveness proceeds are tax deductible. 

On April 30, 2020, the IRS released Notice 2020-32. Referencing Internal Revenue Code section 265(a)(1), it determined that expenses paid with PPP loan proceeds forgiven are not tax deductible. Expenses paid with any PPP loan proceeds repaid would be tax deductible. The Notice references in part, “Consistent with the purpose of section 265, this treatment prevents a double tax benefit.”

For a full text of the Notice, see the link that follows.

Notice 2020-32 provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). 

If you have questions, contact your Sisterson representative or