Congress established multiple programs to assist individuals, families, businesses, medical providers, and others in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Paycheck Protection Program (PPP) provides loans to small businesses to cover certain operating expenses. The portion of a PPP loan used to pay covered expenses is fully forgivable, with no resulting tax liability. This created uncertainty, however, with regard to whether those same expenses are considered tax-deductible. IRS Notice 2020-32 resolves this uncertainty. Businesses receiving PPP loan forgiveness may not deduct expenses covered by this provision of the CARES Act, and if a business claims those expenses as deductions, they may not be eligible for loan forgiveness.
What Is a PPP Loan?
The PPP appears near the beginning of the CARES Act, in § 1102. The program provides loans to small businesses to cover payroll expenses, rent and mortgage payments, utilities, and other costs needed to keep the business running for the period from February 15 to June 30, 2020. The primary purpose of these loans, as indicated by the name of the program, is to enable businesses affected by the COVID-19 pandemic to keep their employees paid.
When Can a PPP Loan Be Forgiven?
Under § 1106(b) of the CARES Act, businesses may obtain forgiveness of all or a portion of the loan. The forgivable amount is equal to the total spent during the “covered period,” an eight-week period beginning on the loan origination date, for expenses directly related to payroll, rent, utilities, and mortgage payments. The forgivable amount is reduced if the business lays off employees or cuts wages.