The IRS released Notice 2020-32, which makes the portion of a PPP loan that is forgiven, not quite as attractive as it originally appeared. Typically, when debt is forgiven, the amount is included in the income of the borrower. The CARES Act specifically addressed this by including Section 1106(i) which states that “Any amount which (but for this subsection) would be includible in gross income… shall be excluded from gross income.”
On the surface, this appeared to be a terrific deal. The SBA lends you $1,000,000, you use it to pay your payroll and rent during your 8-week period, and the SBA forgives the debt. The “grant” made to you by the SBA is not included in income.
But there is a catch. The CARES Act specifically tells us that the debt forgiven will not result in income to the borrower. With the release of Notice 2020-32, the IRS makes this provision of the CARES Act less attractive. Citing IRC Sec. 265 and case law, the IRS announced its view that while the income is excluded, any expenses paid with the excluded income are non-deductible (effectively making the amount forgiven income to the borrower).
KROST Insight: While the move makes sense from a policy perspective, we question whether this was the intent of Congress. Why would the CARES Act address the income impact from debt forgiven but not address the deductibility of the expenses incurred? It is conceivable that Congress did not intend for PPP loans to have any negative impact on taxpayers.
Time will tell if taxpayers or Congress address the IRS position related to the deductibility of expenses paid with PPP debt that was forgiven.
About the Author
Lou Guerrero, CPA, MBT, Principal
Tax, Tax Specialty Services, Financial Services Sector
Luis (Lou) A. Guerrero, CPA, MBT is Vice President of KROST CPAs and Consultants. As the Tax Practice department leader for KROST, Lou is responsible for the overall tax function of the firm and specializes in clients in the Financial Services sector (hedge funds, money managers, private equity), family office and high net worth individuals, Real Estate, Food Service (restaurants and related), Technology (including manufacturing and distribution) and professional service firms. » Full Bio