In a Notice, the IRS has clarified that no deduction is allowed for an expense that is otherwise deductible if both

  1. The payment of the expense results in forgiveness of a loan made under the Paycheck Protection Program and
  2. The income associated with the forgiveness is excluded from gross income pursuant to Coronavirus Aid, Relief, and Economic Security Act.

Background—Paycheck Protection Program.

Under Act Sec. 1102 of the Coronavirus Aid, Relief, and Economic Security Act (PL 116-136, CARES Act, the Act), a recipient of a loan (covered loan) made pursuant to the Paycheck Protection Program may use the proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations.

Under Act Sec. 1106(b), a recipient of a covered loan can receive forgiveness of indebtedness on the loan (covered loan forgiveness) in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the covered loan’s origination date

  1. Payroll costs
  2. Any payment of interest on any covered mortgage obligation
  3. Any payment on any covered rent obligation
  4. Any covered utility payment.

Covered loan forgiveness not income.

Act Sec. 1106(i) provides that, for purposes of the Code, any amount that (but for Act Sec. 1106(i)) would be includible in gross income of the recipient by reason of forgiveness” shall be excluded from gross income.” Thus, the Notice says, Act Sec. 1106(i) operates to exclude from the gross income of a recipient any category of income that may arise from covered loan forgiveness.

Deductible expenses.

In general, Code Sec. 162 provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction under Code Sec. 162 generally is appropriate. Code Sec. 163(a) provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.

No double tax benefit.

Code Sec. 265(a)(1) and Reg. §1.265-1 provide that no deduction is allowed to a taxpayer for any amount that is wholly exempt from income taxes.

The purpose of Code Sec. 265 is to prevent a double tax benefit. (Notice 2020-32)


The Notice says that, to the extent loan proceeds forgiven are exempted from reportable income, any otherwise allowable deduction paid with the “forgiven” loan proceeds will be non-deductible.