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December 06, 2021 The Tax Lawyer

Section 265 Disallowance and the PPP Expense Nightmare

Vol. 75, No. 1 - Fall 2021

by Amandeep S. Grewal


Through the CARES Act, Congress established a generous Paycheck Protection Program (PPP). Under that program, recipients would get loans that could easily qualify for tax-free forgiveness. As an added bonus, taxpayers would enjoy tax deductions when they spent the amounts they borrowed.

Or so it seemed. After the CARES Act passed, the Service promptly issued a notice denying deductions for PPP expenses. Secretary Treasury Steven Mnuchin personally reviewed the matter and announced that the Service’s position followed from “Tax 101.” Congress eventually stepped in and offered a narrow statutory clarification: PPP expenses would be deductible.

Unfortunately, Congress did not go far enough. The Service, with the blessing of some courts, has long used an aggressive interpretation of section 265(a) to deny deductions allegedly allocable to tax-exempt income.

This Article explains the conceptual problems with the Service’s approach and argues that it should be abandoned. The Article also explains why Congress should remedy the Service’s error, and it explores alternative anti-abuse rules.

Read the full article or download the complete issue.