Significant Tax Implications of PPP Loans Unless Congress Acts

5 May 2020 2:44 PM | Start. Law (Administrator)

IRS Notice 2020-32 has clarified that standard business deductions, such as payroll, will not be deductible if the payment of the expense results in forgiveness of a PPP loan.          

This policy is consistent with deduction limitations intended to prevent a double tax benefit– if a business receives income, does not pay tax on that income, pays an expense with that income, and claims a deduction for that expense, then it will have received a double tax benefit: first when it received income and did not pay tax on it and second when it paid an expense with the untaxed income and claimed a deduction for the payment of that expense- but seems remarkably inconsistent with the intention of the CARES Act.        

It appears that the drafting of the PPP provisions simply failed to take into account, or potentially even consider, how the IRS would treat the impact of PPP Loan forgiveness of expense deductions. Notice 2020-32 makes it clear that, to avoid this problem and insure that borrowers do not have a significant and unexpected tax liability, Congress will have to enact an amendment to the PPP provisions of the CARES Act. 

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