IRS Obliterates Paycheck Protection Program Loan Tax Benefits

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a qualifying business that receives a Paycheck Protection Program (PPP) loan through the Small Business Administration (SBA) is generally allowed to receive forgiveness of an amount of such a loan equal to eight weeks’ worth of payroll, rent, utilities and certain other documented costs. The Act also expressly provides that the forgiveness of the loan shall not be treated as discharge of indebtedness income for federal income tax purposes.

On April 30, 2020, however, the Internal Revenue Service (IRS) issued a notice (Notice 2020-32) to the effect that all the expenses reimbursed by the PPP loan that is forgiven — i.e., the payroll, rent, utilities and other documented costs — shall be treated as nondeductible for federal income tax purposes on the ground that they are attributable to tax-exempt income. The notice renders entirely nugatory the express statutory provision in the CARES Act that the loan forgiveness shall not result in taxable income.

Return filing deadlines for any period covered by the PPP and loan forgiveness are far off. It is possible that when the Department of the Treasury and the IRS have additional time to consider the purposes of this important program and the unambiguous statutory language (which expresses the legislative intent), clearer heads will prevail and the IRS will clarify that, indeed, the forgiveness is not taxable and deductions are allowed. Or perhaps Congress may, in its next installment of COVID-19 legislation, include a “technical correction” that expressly overrules the IRS’s position regarding deductibility of the relevant expenses. Indeed, within 24 hours of the release of the IRS notice, Senate Finance Committee Chairman Chuck Grassley and others have condemned it as contrary to the legislative intent. In any event, taxpayers should consult with their tax return preparers as the return deadlines approach to make sure that they are filing their returns consistent with statutory and other binding guidance at the time, recognizing that it will be the courts that may be the final arbiters of the issue.