The IRS has recently confirmed that they will not allow taxpayers to claim tax deductions for expenses that were paid by PPP loans that were forgiven, even for recurring expenses like wages and rent that are normally deductible.
The majority of each PPP loan is intended to be allocated toward payroll expenses, but the remaining amount can be used to pay rent, mortgage interest, utilities and interest on other debt during the eight weeks after the borrower receives their PPP funds.
IRS Notice 2020-32 clarified that these business expenses will not be deductible if they were paid for by a forgiven PPP loan.
The ruling is based on the fact that deductions typically are not allowed on exempt income. Because PPP loan forgiveness is excluded from taxable income under the CARES Act, taxpayers may not claim deductions for these expenses.
The IRS Notice is available at: www.irs.gov/pub/irs-drop/n-20-32.pdf