The IRS has issued guidance relating to the tax deductibility of expenses paid with a Paycheck Protection Loan that is forgiven. (Notice 2020-32. https://www.irs.gov/pub/irs-drop/n-20-32.pdf)
According to the CARES Act, the forgiveness of indebtedness is not taxable income. (CARES Act Section 1106(i).)
The CARES Act doesn’t specify whether the expenses are tax deductible.
A Paycheck Protection Loan is eligible for forgiveness when the proceeds are used for the following expenses during the 8-week “covered period” beginning on the the loan’s origination date (CARES Act Section 1106(b)):
- Payroll costs
- A payment of interest on a covered mortgage obligation
- A payment on a covered rent obligation
- A covered utility payment
The IRS reminds taxpayers that, according to Internal Revenue Code Section 265(a)(1), no deduction is allowed for any item that is allocable to tax-exempt income.
To receive tax-exempt income from the federal government and to be allowed a tax deduction paid using the income would be a double benefit.
Taxpayers and their tax return preparers should note that these items won’t be tax-deductible on their 2020 income tax returns.