The Internal Revenue Service issued Notice 2020-32 that denies a federal income tax deduction for any expenses that qualify for loan forgiveness under section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (Act) for loans received under the Paycheck Protection Program.
This is not entirely unexpected given that the Internal Revenue Code has long denied deductions that are funded with non-taxable income.
There was a lot of chatter regarding this issue since passage of the Act was passed. There are some that believe that interpretation flies in the face of Congressional intent. This is the law of the land for now.
What is not entirely clear is how this Notice applies to the self-employed and partnerships that receive loan forgiveness equal to a portion of their 2019 net income from self-employment. The Small Business Administration (SBA) guidance provides that these persons will have their loan forgiven for 8/52nds of their 2019 net income from self-employment. This is the amount that would be subject to self-employment taxes on Form 1040 Schedule SE. Our interpretation is that this has no impact on these amounts since these amounts are based on 2019 income that already is net of all deductions.
Have questions about how this might affect you? Reach out to us so that we can partner with you on your tax needs.