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Disallowed Deduction of Expenses For Payroll Protection Program Recipients

The Internal Revenue Service recently issued Notice 2020-32 providing guidance on the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred by a taxpayer who receives a loan pursuant the Small Business Administration’s Payroll Protection Program (PPP).

The notice indicates that no federal deduction is allowed for any expenses that would otherwise be deductible if the payment of the expense results in forgiveness of a covered loan through the PPP and the associated income is excluded from gross income.  Eligible recipients of a covered loan through the PPP who use the proceeds to pay certain eligible costs including payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities and interest on other existing debt obligations can receive forgiveness of indebtedness on the loan based on certain criteria.  The CARES ACT excludes from gross income any amount that would be includible in gross income of the recipient by reason of forgiveness of the indebtedness.  The IRS has clarified that while the forgiveness of the loan is excluded from income, the related expenses are not deductible.