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IRS's overreaching PPP deduction denial makes taxpayers worse off

The IRS last week declared in Notice 2020-32 that expenses paid using Paycheck Protection Program (PPP) loans that are forgiven under the CARES Act are not deductible.

This is clearly contrary to congressional intent. As the AICPA notes, this eviscerates the benefit of the provision of the Act excluding the forgiveness of the PPP loans from income.

But, it is worse than that. In the normal case, businesses that borrow money to pay deductible expenses get to deduct those expenses when they are paid. If that loan is then forgiven in a later year, there is offsetting cancellation of debt income, but not until that later year when the debt is forgiven. So, the taxpayer actually gets the time-value-of-money benefit for those taxes.

With the IRS's position, taxpayers are actually worse off because they also lose that time value of money benefit.

Is there anyone other than the IRS that truly believes that Congress intended to make taxpayers worse off by including the provision making the forgiveness of the PPP loans non-taxable?

The AICPA believes strongly that the IRS’s interpretation denying deductions of expenses forgiven under the PPP program is contrary to Congress’s intent. Chris Hesse, CPA, chair of the AICPA Tax Executive Committee, said: “In effect, the IRS guidance means that the taxability provision [Section 1106(i)] has no meaning. Why waste the ink to say that for purposes of the Code, the loan forgiveness is not includible in income, if the government will just take away deductions in the same amount?”


cares act, irs, ppp, forgiveness, cod income, overreach, deduction, denial