IRS Denies Tax Deductions For Wages, Rent Paid With Forgivable PPP Loans
No such thing as "free assistance"
The Paycheck Protection Program (PPP) offers an alluring loan of up to $10 million tax free. If you comply, you don’t even have to pay it back. What’s more, there is no forgiveness of debt income when your loan is forgiven, something that is standard fare if you are relieved of paying back debt.
However, the Internal Revenue Service (IRS) Notice 2020-32 confirms you can’t claim tax deductions, even if the wages, rent, etc. that are normally fully deductible. The CARES Act provisions for small business include the PPP, which calls for up to $10 million in forgivable loans to cover employee payroll, and immediate tax credits that are designed to do the same thing.
Since the PPP came out, it has been roiled in controversy, with the SBA and banks offering a less than seamless roll out, and a true run on the bank that depleted all the money very fast. Congress eventually came to the rescue by authorizing more money, but that seems likely not to last very long either. And the FAQs and other pieces of guidance have been fast and furious. So has speculation about various points. There have been debates about the tax deduction point, with some people saying you could still deduct the wages, since the CARES Act did not seem to say otherwise. But under traditional tax principles, it seemed too good to be true that you could get the free money, not pay discharge of debt income, and still deduct the payments of wages and rent made with the free money. The IRS notice confirms that.
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