Mahopac, N.Y., June 23, 2020, by Andy Powers: Congress, when enacting the CARES Act, included a number of small business relief programs that included Payroll Protection Loans that are forgiven if used within the first 8 weeks to cover specific expenses such as utilities and rent as well as payroll costs intended to stimulate employment and the economy. The Act also specifically states that such forgiveness of indebtedness, that would otherwise be considered as taxable income, would be excluded from taxable income by the business. The payroll recipient, however, would include the wages as earned income when filing their personal income tax returns.
IRS disagreed with Congress and soon after the passage of the CARES Act, released Notice 2020-32 which states that no deduction will be allowed a business for any expense paid with forgiven CARES Act funds, which has the same tax effect of including forgiven loan indebtedness as income. As justification, the IRS pointed to Internal Revenue Code Section 265 that refers to denial of double tax benefits.
Senators on both sides immediately took notice, stating that deduction denial of these expenses is contrary to the legislative intent, and on 5 May drafted S.3612-Small Business Expense Protection Act of 2020 which amends the CARES Act to specifically permit the deduction of expenses paid with funds from forgiven PP Loans. As of the date of this writing, the bill has been read twice and referred to the Senate Finance Committee while awaiting Congressional approval. Without such approval, however, the IRS position continues to stand fast, requiring special accounting measures be taken to match expenses against forgiven PPL indebtedness.