Paycheck Protection Program: Taxability of Loan Forgiveness

On April 30, 2020, the IRS released additional guidance in Notice 2020-32 regarding the tax treatment of amounts forgiven under the Paycheck Protection Program (PPP) loans, which are a key part of the CARES Act. According to this new guidance, expenses upon which loan forgiveness amounts are based, will not be deductible to the extent of the forgiveness. For instance, if you use loan proceeds to pay your tax-deductible payroll expenses, those expenses will not be deductible if the loan is forgiven. This is meant to prevent taxpayers from receiving a double tax benefit.

The statute of the CARES Act indicates that amounts forgiven under the PPP loan program “shall be excluded from gross income;” however, the statute is silent on the tax treatment of related expenses. The IRS indicates that loan forgiveness is similar to other types of non-taxable income. Since expenses related to non-taxable income are non-deductible, the same treatment applies in this instance. Effectively, this results in an increase in a taxpayer’s taxable income equal to the amount of forgiveness.

The net economic benefits of loan forgiveness depend on each taxpayer’s effective tax rate and expected taxable income or loss in 2020. For example, a profitable taxpayer receiving a $100,000 forgiven loan with an effective tax rate of 30% will result in a $70,000 net economic benefit.

While many of us are not surprised by this guidance, it does seem to contradict Congressional intent. If Congress had expected that loan forgiveness amounts would be taxable, the statutory language related to the income exclusion could have been omitted. The concern is that this comes after much rhetoric out of Washington that the amounts would be “tax-free,” and they are not according to this Notice. We expect that there may be more to come on this topic and will keep you informed as events unfold.

We remain poised to help you navigate how this relates to your business loan. Please contact your BMF Advisor to discuss the best course of action for you and your business.

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About the Authors

Theodore A. Wagner
Theodore A. Wagner
Partner and Executive Committee Member, Taxation Services


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