The IRS has taken the position that any expense paid that facilitates forgiveness of a PPP loan will not be deductible. Because the expenses were reimbursed, the question before the Tax Court was whether (a) the expenses were deductible after reimbursement or whether (b) the expenses were “allocable to” the VA’s non-taxable reimbursement and thus not deductible under IRC §265. The first is that which was originally contemplated by Congress when the provision was enacted: disallowance of direct costs of earning tax-exempt income. If the expenses are incurred to earn a mixture of taxable and tax-exempt income, they will be denied a deduction in the same proportion that the tax-exempt income bears to total income. Many experts feel that it is probable that PPP loan forgiveness should not be subject to Federal income tax, and that the deductibility for the expenses paid to facilitate such forgiveness should not be limited.

Source: Forbes December 17, 2020 20:26 UTC