The CARES Act's Paycheck Protection Program provides federal funding for loans to small businesses adversely impacted by the COVID-19 pandemic. PPP borrowers are eligible for loan forgiveness in an amount equal to the sum of payroll costs, interest on mortgages, rent, and utilities payments incurred or paid during the eight-week period beginning on the date of the loan, up to the principal amount of the loan. The amount of any PPP loan forgiveness is statutorily excluded from taxable income.

In Notice 2020-32, the IRS concluded that these eligible expenses are not deductible because they are incurred in connection with amounts excludible from gross income.

But this may not be the end of the story. On May 6, a bipartisan group of congressional leaders wrote a letter to the Treasury Department urging it to reconsider its position. Stay tuned for future updates.