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Expenses Paid with PPP Loan Proceeds Not Deductible

Small businesses that received a Paycheck Protection Program (PPP) Loan are able to have their loan forgiven if the loan proceeds were used for certain qualifying expenses during the covered period. The CARES Act specified that the forgiven loan amount would not be considered taxable income to the business; however, the IRS issued guidance this past spring stating there would be no tax deduction allowed for expenses paid with proceeds from a loan that is forgiven. The IRS has released a revenue ruling confirming such along with a revenue procedure that provides a safe harbor for taxpayers.

What does this mean for businesses?

If a business expects to have their loan forgiven, either this year or next, otherwise deductible expenses that were paid with PPP loan proceeds are not deductible expenses for 2020.  This only applies to expenses paid for with the loan proceeds.

If a business expects to have their loan forgiven and finds out later that they do not qualifiy or decides not to apply for loan forgiveness, the safe harbor allows for deduction of qualified expenses on their 2020 or 2021 income tax return.

Ultimately, the IRS is trying to prevent two tax benefits on the same expenses. Think no “double dipping”.

As previously stated, the CARES Act specified that any loan forgiven would not be counted as income, which leads some to believe the IRS’s interpretation is wrong, and expenses should be deductible.  The Small Business Expense Protection Act of 2020 was introduced last spring but hasn’t made any headway since then.  It remains to be seen if legislation will pass to overturn the IRS’s ruling.  

Sources:

“RP-20-51 & RR-20-27: Paycheck Protection Program,” IRS Guidewire, Internal Revenue Services, November 17, 2020, (Source)

Posted in: Business Owners, Covid19, Tax

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