The forgiven portion of the loans received under the Paycheck Protection Program (PPP) will not be taxable based on the language of section 1106(j) of the CARES Act.
However, with respect to the expenses relating to this tax-free income, these expenses would not be deductible. IRC section 265 states that no deduction shall be allowed for any amount otherwise allowable as a deduction which is allocable to one or more classes of income. Accordingly, based on the above section of the IRS code any expenses associated with PPP loans that are forgiven would not be deductible. Allowing deductible would provide taxpayers with a double benefit; the ability to not pay taxes on the forgiven loan amount while also being able to deduct the expenses.
If desired, Congress could override the IRS’s stance by passing a law that explicitly allows the deductions. It has done so previously for religious leaders and military service members, allowing them to deduct property taxes and mortgage interest even if they’re receiving tax-free housing allowances.
We anticipate further guidance on the above issue in the upcoming months.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.