With stay-at-home orders and prohibitions on social gatherings still in effect, most of us are safe from those spring cookout guests with bad habits, like double-dipping their chips. The IRS recently gave loan borrowers under the CARES Act Paycheck Protection Program another reason against double-dipping. On April 30, 2020, the IRS announced that Paycheck Protection Program (PPP) loan recipients cannot deduct expenses that are paid with forgiven PPP loan proceeds.
Under the PPP provisions of the CARES Act, borrowers who pay certain covered expenses (payroll costs, benefits, rent, interest and utilities) using funds borrowed under the PPP program may have some or all of their loan forgiven. The CARES Act also modifies the general rule regarding the tax treatment of debt that is forgiven by providing that amount forgiven under the PPP program will not be included in the borrower’s taxable income.
Ordinarily, a business produces taxable income from making sales or furnishing services and is permitted to deduct from that income the expenses it incurred to produce it.
In its recent guidance, the IRS reasoned that the CARES Act exclusion from income for forgiven PPP loan amounts results in a class of tax-exempt income under the federal tax laws and regulations. The IRS concluded that, although the expenses paid by the PPP may be otherwise deductible as trade or business expenses or interest under the Internal Revenue Code, another section of the Code, intended to prevent a double tax benefit, disallows deductions sourced to tax-exempt income. As a result, borrowers will not be permitted to “double-dip” by claiming an additional tax break on money received through this program designed to provide economic assistance.
The guidance will impact tax planning for PPP loan borrowers and the overall value of the PPP loan forgiveness program.
This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.
We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or firstname.lastname@example.org.