Many have begun to receive funds from the Paycheck Protection Program. As you are aware, the program has a loan forgiveness clause if at least 75% of the funds were used for payroll costs over 8 weeks beginning after loan origination. No more than 25% may be used for the specific items of mortgage obligations, rent, and utilities.
The Paycheck Protection funds that subsequently are forgiven are not included in taxable income. This would be considered tax exempt income. IRS released Notice 2020-32 yesterday which clarifies that any expenses related to tax exempt income are not deductible for tax purposes. Therefore, there is no tax deduction for payroll costs, mortgage, rent, and utilities paid with forgiven Paycheck Protection funds.
We also want to highlight the accounting treatment for the funds forgiven. Under Generally Accepted Accounting Principles, when a loan is forgiven it is referred to as an Extinguishment of Debt. Extinguishment of Debt would be considered Income for accounting purposes. The related items of payroll, mortgage (interest portion), rent, and utilities would still be allowed to be expensed for accounting purposes.
In short, when the Paycheck Protection funds are forgiven, they are recorded as Income for accounting purposes with related expenses allowed. For tax purposes, the forgiven funds are Not considered income and the related costs are Not tax deductible.