Section 265 Disallowance and the PPP Expense Nightmare

75 Tax Law. 37

42 Pages Posted: 8 Jun 2021 Last revised: 31 Dec 2021

See all articles by Andy Grewal

Andy Grewal

University of Iowa - College of Law

Date Written: June 7, 2021


Through the CARES Act, Congress established a generous Paycheck Protection Program. Under that program, recipients would get loans which 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 IRS promptly issued a notice denying deductions for PPP expenses. Secretary Treasury Steven Mnuchin personally reviewed the matter and announced that the IRS’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 IRS, 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 IRS’s approach and argues that it should be abandoned. The Article also explains why Congress should remedy the IRS's error and explores alternative anti-abuse rules.

Keywords: Tax, 265, CARES Act, PPP

Suggested Citation

Grewal, Amandeep S., Section 265 Disallowance and the PPP Expense Nightmare (June 7, 2021). 75 Tax Law. 37, Available at SSRN:

Amandeep S. Grewal (Contact Author)

University of Iowa - College of Law ( email )

Melrose and Byington
Iowa City, IA 52242
United States

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