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IRS Issues Guidance on Tax Impact of PPP Loan Forgiveness Under the CARES Act

Source: White and Williams LLP

The Internal Revenue Service (IRS) recently issued Notice 2020-32 (Notice), which discusses the deductibility of expenses that are funded by a Paycheck Protection Plan (PPP) loan and the subsequent loan forgiveness.[1] Section 1106 of the Coronavirus Aid, Relief, and Economic Security CARES Act (CARES Act) states that loan proceeds used for certain types of expenses, such as payroll costs and certain payments of interest, rent and utilities, can be forgiven and that the loan forgiveness is excluded from gross income under the Internal Revenue Code of 1986, as amended (Code).

The Notice denies a tax deduction for an expense funded by a PPP loan that is subsequently forgiven and this interpretation of the CARES Act, and the intersection of the PPP loan provisions and available tax deductions, is raising significant concern with businesses as well as already triggering requests for legislative relief. In addition, businesses that decided to take a PPP loan in lieu of the employee retention credit[2] under Section 2301 of the CARES Act (Credit) now lose tax deductions that were factored into their economic analysis of the benefit of obtaining a PPP loan or using the Credit.

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