IRS Announces Taxpayers May Not Claim Deduction for Expenses Paid by Forgiven PPP Loans

attorney Peter L. Ente

Peter L. Ente | Senior Counsel

April 30, 2020

Additional Paycheck Protection Program Guidance Announced

The Internal Revenue Service recently issued guidance stating taxpayers may not deduct otherwise deductible expenses that are paid with the proceeds of a Paycheck Protection Program (“PPP”) loan, if the payment of the expenses results in loan forgiveness under the program. Loan forgiveness is available under the program for the following expenses paid and incurred during the eight-week period after the borrower receives PPP loan proceeds:

  • Payroll costs;
  • Mortgage interest;
  • Rent; and
  • Utilities.

Additional guidance on loan forgiveness is anticipated.

PPP Loans Available to Purchasers of a Business, Including Certain Asset Purchasers

The Small Business Administration (SBA), in consultation with the Treasury Department compiled a Frequently Asked Questions page regarding PPP, called FAQ for Lenders and Borrowers. The FAQ was recently updated:

FAQ #38 advises that a business that was in operation on February 15, 2020, but had an ownership change after that date can qualify for a PPP loan if it meets the other eligibility criteria.

Of particular interest is that FAQ #38 states that this rule can apply to asset purchasers, even if the change in ownership results in the need for a new Employer Identification Number (EIN) and even if the acquiring business was not in operation until after February 15, 2020. The FAQ notes that if the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application.

This rule, and availability of a PPP loan does not apply where the pre-sale business had applied for and received a PPP loan in its own right. The FAQ notes that the SBA and Treasury have determined that the Coronavirus Aid, Relief, and Economic Security Act requirement that a business “was in operation on February 15, 2020” should be applied based on the economic realities of the business’s operations.

SBA and Treasury Confirm Secretary Mnuchin’s Recent Comments that Large PPP Loans Will be “Reviewed”

On April 28, 2020, the Treasury Secretary Steven Mnuchin told the Wall Street Journal that PPP loans for more than $2 million would face audits, with spot checks for smaller loans. Mnuchin told the Journal that the law is clear that borrowers, not banks, “face criminal liability for making certifications that weren’t true.” 

FAQ #39 states that the SBA will review loans in excess of $2 million, in addition to other loans “as appropriate,” following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. 

Peter L. Ente is Senior Counsel in our Corporate, Mergers & Acquisitions, and Tax Planning Practice Groups.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.

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