Businesses taking part in the Paycheck Protection Program (PPP) put in place by the CARES Act may not be able to take tax deductions for associated wages and other expenses if their loans are forgiven – diminishing the potential value of the popular program.

The Internal Revenue Service (IRS) issued Notice 2020-32 providing clarification of a major point of confusion in the $670 billion loan program – deductibility of expenses paid with PPP funds. The notice confirms you can’t claim tax deductions, even for the wages, rent, etc. that are normally fully deductible, if these items were paid with the PPP loan that is forgiven.

This treatment was put in place to prevent a double tax benefit, as tax code does not generally permit deductions for tax-exempt income. If borrowers have all or part of their PPP loans forgiven, they will not have to bear the economic costs of these expenses.

Many anticipate Congress will push back on the IRS to allow these expenses funded with the PPP loans to be tax-deductible. Doeren Mayhew will continue to monitor the situation for updated guidance. In the meantime, if you have questions about how your PPP loan will impact your business’s tax liabilities, contact your Doeren Mayhew tax advisor.