The PPP was created by Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136. Under Section 1106(b) of the CARES Act, an eligible recipient of a covered loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the eight-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; and (4) any covered utility payment. Section 1106(i) excludes from gross income any amount forgiven under the PPP.
The notice explains that, although the expenses paid by the PPP may be deductible under Sec. 162 as trade or business expenses or under Sec. 163 as interest, Sec. 265 disallows a deduction to a taxpayer for any amount otherwise allowable as a deduction to the taxpayer that is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) that is wholly exempt from the taxes imposed by Subtitle A of the Code. The purpose of Sec. 265 is to prevent a double benefit by preventing a deduction for excluded income.
The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses.