Adobe Stock
Adobe Stock

This article originally appeared on ProSales.

The Internal Revenue Service (IRS) issued guidance stating that employers who received loans through the Paycheck Protection Program (PPP) will not be eligible for tax deductions on expenses if payments of those expenses funded by the loan results in the loan are being forgiven. According to IRS Notice 2020-32, employers can’t claim tax deductions, even for the wages, rent, etc., that are normally fully deductible. After the IRS notice, Congress could reverse IRS denial of tax deductions.

In general, the tax rules for a business-related loan are wages, health care, rent, and utilities are deductible expenses and debt forgiven is taxable income. For a business with a PPP loan that is forgiven, these rules reverse themselves: PPP debt forgiven is not taxable income and wages, health care, rent, and utilities paid via the forgiven debt are not deductible expenses.

The PPP originally was allocated $349 billion as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The construction industry led all other subsectors with nearly $40 billion in loan approvals across more than 114,000 applications in the first two weeks of the PPP. Initial funding for the program ran out within two weeks, but the government was quick to approve a bill including an additional $310 billion allocation for the PPP.

Under the PPP, small businesses--companies with 500 employees or fewer--can apply for partially forgivable loans that can cover operating expenses. Borrowers can apply for loans up to 2.5 times the company’s monthly payroll costs for the period between February 15, 2020, and June 30, 2020 or $10 million, whichever is smaller. The portion of a PPP loan used to cover the first eight weeks of payroll, interest on mortgages, rent, and utilities can be forgiven. Forgiveness is also contingent upon employers maintaining or quickly rehiring employees and maintaining salary levels.