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The IRS Friday released a notice clarifying that businesses that receive a loan through the paycheck protection program (PPP) created by the CARES Act cannot deduct otherwise tax-deductible expenses if the payment of the expense results in forgiveness of a covered PPP loan.

PPP loans are intended to be used to cover payroll costs and other employee benefits, as well as some facility and operational costs – many of which are usually tax deductible. PPP borrowers can apply for forgiveness in an amount equal to the sum of these costs during the eight-week period from loan origination.

The IRS notice references a section of the Internal Revenue Code (IRC) that prevents double tax benefits. As forgiveness of PPP loans is excluded from the taxpayer's gross income, the IRC disallows any otherwise allowable deduction of expenses that are forgiven to prevent the double tax benefit of the borrower.

To address this issue, Congress would have to pass legislation that includes language explicitly allowing the deductions.

NAFCU is engaged on Capitol Hill as lawmakers continue to discuss potential additional funding for the PPP and other changes. The association is updating its PPP FAQs as more information is available.