On Thursday evening, April 30, 2020, the IRS released guidance advising taxpayers that expenses paid using Paycheck Protection Loan proceeds will not be tax-deductible.
The IRS made their case in Notice 2020-32 citing Section 265, a code section historically used to disallow items like interest expense incurred to create tax-free interest income.
While the guidance provided by the IRS is authoritative, this may not be the final word on the matter. Congress went to the trouble of ensuring that the PPP loan forgiveness would be excluded from gross income; if they truly intend for there to be no tax-effect they could include an amendment to Section 265 in upcoming legislation.
As we wait, business owners should make sure they are properly documenting all PPP expenditures. Tax planning for 2020 will also be vital to ensure that businesses are correctly projecting their taxable income.