Deductibility of Expenses Reimbursed by the Paycheck Protection Program

The IRS released guidance on April 30th to explain that a taxpayer that receives a loan through the Paycheck Protection Program (PPP) is not permitted to deduct expenses that are normally deductible under the Code, to the extent the expenses were reimbursed by a PPP loan that was then forgiven. Under Section 1106(b) of the CARES Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the eight-week covered period beginning on the covered loan’s origination date: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation; (3) any payment on any covered rent obligation; and (4) any covered utility payment. Section 1106(i) excludes from gross income any amount forgiven under the PPP.

The notice explains that the expenses are not allowed because the forgiveness of the loan will not be included in income, this follows IRS code section 265. This code section disallows the deduction of expenses related to tax exempt income.

The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses. Since the CARES Act did not address this in the bill, the deductibility of the expenses will follow code section 265 and will not be deductible.

Please call your CPA if you have questions about the content of this article.


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