Legislation introduced in the Senate on Tuesday would overrule an IRS notice and clarify that ordinary expenses funded by Paycheck Protection Program (PPP) loans are deductible by taxpayers. The bill, the Small Business Expenses Protection Act of 2020, S. 3612, is currently in the Senate Finance Committee and is supported by the AICPA.
The PPP was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136. Under Section 1106(b) of the CARES Act, an eligible 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 IRS last Thursday issued Notice 2020-32, which says that taxpayers receiving loans through the PPP are not permitted to deduct normally deductible expenses to the extent the expenses were reimbursed by a PPP loan that was then forgiven. The IRS notice reasoned that Sec. 265(a)(1) prohibits an otherwise allowable deduction under any provision of the Code, including Secs. 162 and 163, for the amount of any payment of an eligible Section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because that payment is allocable to tax-exempt income.
If enacted, S. 3612 would overturn that position and allow taxpayers to deduct covered expenses paid or incurred by an eligible recipient of a PPP loan that is forgiven under Section 1106(b).
On Tuesday, the AICPA sent a letter to Sens. Tom Carper, D-Del., John Cornyn, R-Texas, Charles Grassley, R-Iowa, Marco Rubio, R-Fla., and Ron Wyden, D-Ore., commending their efforts and supporting S. 3612.
The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.
For tax-related resources, visit the AICPA’s Coronavirus (COVID-19) Tax Resources page.
— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor in chief.