Gibson Dunn | IRS Issues Notice Clarifying Expenses Funded With Proceeds From Small Business Administration Loans Under Paycheck Protection Program
May 1, 2020
On Thursday, April 30, 2020, the Internal Revenue Service (the “IRS“) issued Notice 2020-32 (the”Opinion“). The notice states that, in the IRS’s opinion, expenses funded using the Small Business Administration’s proceeds (“SBA“) Loans made under the Paycheck Protection Program are not deductible if the loan is canceled.
Background to the Paycheque Protection Program
The Paycheck Protection Program was created by the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136 (116th Cong.) (March 27, 2020) (the “CARES Law“), and greatly expands the availability of SBA loans for some businesses.
Under Section 1106 (b) of the CARES Act, if certain conditions are met, recipients of these new SBA loans are eligible for loan forgiveness in an amount equal to salary costs, mortgage interest payments , rent and utilities incurred or paid by the beneficiary during the eight weeks following the origination of the loan.
Tax treatment of SBA loan forgiveness and associated deductions
Typically, when a loan is forgiven, the borrower includes the forgiven amount in gross income. Section 1106 (i) of the CARES Act modifies this rule by excluding from income any canceled SBA loan amount that would otherwise be included in the gross income of the beneficiary. The CARES Act, however, does not say whether expenses funded with the proceeds of these loans are deductible for federal income tax purposes.
The Opinion, which is the first guideline to deal specifically with the matter, provides that while ordinary and necessary expenses incurred in the course of a trade or business are generally deductible, no deduction is available for expenses funded from the proceeds of a canceled SBA. loan, believing that allowing such a deduction would confer an inappropriate double taxation benefit (a deduction for expenses paid with the loan proceeds remitted and no inclusion in income of the loan amount remitted).
The notice clearly sets out the IRS’s position regarding the non-deductibility of expenses funded using loan proceeds from the Paycheck Protection Program that are canceled. It should be noted, however, that the applicable law in support of the position taken in the opinion is not entirely clear and that the opinion does not address all the practical scenarios that a taxpayer might face who receives a loan under the Paycheck Protection Program. For example, the Notice does not take into account situations where the related expense is incurred in a taxation year different from the taxation year in which the debt forgiveness is expected or occurs, or whether (or how) a taxpayer can determine with certainty that the debt will be written off, particularly in light of the fact that the requirements of the CARES Act continue to be the subject of further regulatory improvements.
 The notice is available on the IRS website at https://www.irs.gov/pub/irs-drop/n-20-32.pdf.
 Section 1102 of the CARES Act. For more details on the Paycheck Protection Program, please refer to Gibson Dunn’s Frequently Asked Questions to Help Small Businesses and Nonprofits Navigate the COVID-19 Pandemic and previous customer alerts regarding the program: SBA Loan Program “Paycheque Protection” under the CARES Act; Small Business Administration and Treasury Department Release Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Releases Interim Final Rule and Final Claim Form for Paycheck Protection Program; Small Business Administration Publishes Interim Affiliate Final Rule, Affiliate Testing Summary, Lender Application and Agreement, and Paycheck Protection Program FAQ, Analysis of Small Business Administration Memorandum on Affiliate Rules and Paycheck Protection Program FAQs; and Small Business Administration issues additional interim final rules and new guidelines on PPP loan eligibility and accessibility.
 CARES Act, article 1106 (b).
 Virginia Blanton, Michael Q. Cannon and Jennifer A. Fitzgerald, Double Taxation Benefits in the CARES Act, 167 Fed Tax Notes. 423 (2020).
Gibson Dunn attorneys are available to answer any questions you may have regarding these developments. For more information, please contact the attorney Gibson Dunn you usually work with, any member of the firm Tax practice group or its Coronavirus Response Team (COVID-19), or the following authors:
Please also feel free to contact one of the following officers and members of the Taxation group:
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* Not admitted to practice in Washington, DC; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.
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