Business Expenses Paid with PPP Loan Funds May Not Be Deductible
On April 30, 2020, the IRS issued Notice 2020-32 which provides that business expenses otherwise deductible will not be deductible if the Payroll Protection Program (PPP) loan used to pay such expenses is partially or completely forgiven. This makes business planning even more difficult.
A “class of exempt income”
The CARES Act allows PPP funds to be used to pay certain covered expenses (payroll, rent, etc.). That’s a good thing. And, the CARE’s Act may allow those loan proceeds to be forgiven without triggering discharge of indebtedness income, which would be taxed at ordinary income rates. That’s a really good thing, as the expenses paid are deductible and the income forgiven is not taxed. The IRS, however, has determined that the portion of a PPP loan that is forgiven creates a “class of exempt income” that results in otherwise deductible expenses paid with such loan funds not being deductible.
Run the numbers
One would think, as I do, that Congress will “fix” this highly conservative IRS position as it defeats a huge part of the benefit intended by Congress to be bestowed upon small businesses during this economic free fall. In the meantime, you might want to “run the numbers” to see if using PPP funds to pay covered expenses is a net benefit to you, or not, if you are ultimately unable to deduct the expenses.
If you have questions or comments, please contact Ron Holmes via email or at 469.916.7700 x 105.
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About Ron Holmes
His real estate law practice is as broad as it is deep. Mr. Holmes has served as lead counsel on real transactions all across the United States (more than twenty States), representing public and private companies, both domestic and international, in all manner of real estate transactions, including large scale multi-use land developments and high rise residential condominiums, to acquisitions and sales of operating property portfolios, office, industrial and retail leasing and virtually every other form of real estate development, construction, financing, investing and leasing.Learn more about Ron…