The IRS announced yesterday that small businesses that get at least a portion of their Paycheck Protection Program loan forgiven cannot deduct the expenses paid for with the forgiven loan proceeds. The deductibility was not addressed in the CARES Act and it was unknown what the end tax result would be.
The IRS is following well settled tax law with its position. When the law does not indicate otherwise, expenses related to tax-free income are not deductible.
In reaction to the IRS announcement, one prominent member of Congress indicated that it may have been Congress’s intent to allow businesses to deduct the related expense even though the loan forgiveness does not generate taxable income. Apparently in the rush to provide funding to businesses quickly, this part of the law may not have been adequately considered.
At this time the related payments are not deductible. We will monitor the situation in case Congress provides a technical correction to produce a different result.