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Paycheck Protection Program Loan Forgiveness: The Devil Is In The Details

The devil is in the details, but where exactly? This week we are starting to see how the broad changes in the recent spate of COVID-19 legislation will be administered. We have new notices on loan forgiveness procedures (did you get your PPP loan yet?).

The Finer Points of PPP Loan Forgiveness

Loan forgiveness offers powerful assistance to those small businesses who were actually able to receive Paycheck Protection Program loan funds. However, loan forgiveness is not without its costs. While amounts forgiven will not be included in income under the usual cancellation of indebtedness rules, business owners may not be entitled to their typical business deductions either. Notice 2020-32 clarifies that otherwise allowable deductions are disallowed if the payment of the expense (1) results in loan forgiveness under the PPP loan program and (2) the income associated with the loan forgiveness is excluded from income under CARES Act Section 1106(i).

What are the tax consequences of loan forgiveness under the paycheck protection loan program?
Under normal circumstances, when a loan or debt is forgiven, the income is included in the debtor’s income under cancellation of debt principles. Paycheck protection loans, however, are excluded from these generally applicable rules—meaning that amounts forgiven are not included in the recipient’s income when forgiven.

However, loan forgiveness is not without its costs. While amounts forgiven will not be included in income under the usual cancellation of debt rules, business owners may not be entitled to their typical business deductions either. Notice 2020-32 clarifies that otherwise allowable deductions are disallowed if the payment of the expense (1) results in loan forgiveness under the PPP loan program and (2) the income associated with the loan forgiveness is excluded from income under CARES Act Section 1106(i).

Expenses like salary, rent, mortgage interest and utilities are generally deductible as ordinary and necessary business expenses under IRC Section 162. These are also exactly the types of expenses can be incurred in order for a business to receive loan forgiveness under the CARES Act. To prevent double dipping, the IRS specifically disallows these and other otherwise-allowable deductions.
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