Your PPP Loan Funds and Tax Deductibility

IRS Releases Guidance on Deducting Expenses Paid for with PPP Funds

What may come as a shock, the IRS recently issued guidance on its position regarding the deductibility for expenses paid for using Paycheck Protection Program (PPP) funds received earlier this year by many businesses.

Although the amount of loan forgiveness will not be counted as revenue, any expenses paid for using the funds received (qualified payroll, state payroll tax, rent, mortgage, utilities), may not be deducted from revenue for 2020. This in essence is a tax or partial tax on the loan funds for companies that experience a profit as a result of the loss of deductibility.

The IRS says allowing these deductions would be double-dipping. Congress moved to reverse the IRS rule in the Small Business Expense Protection Act, S.3612 – But that bill stalled and has still not passed. There remains hope that Congress could still reverse the IRS denial of tax deductions.

Delayed Forgiveness

For businesses that will not seek forgiveness until 2021, or have not yet received forgiveness approval in 2020, yet incurred the expenses in 2020, the IRS says no dice on deducting those expenses. The reason being is that a business has a reasonable expectation that their loan will be forgiven.

Denied Forgiveness

The IRS has also released Rev. Proc. 2020-51, which provides a safe harbor for PPP borrowers whose loan forgiveness has been partially or fully denied and who wish to claim deductions for otherwise eligible payments on a return, amended return, or administrative adjustment request.

Keep in mind, this post is not meant to be an exhaustive look at this new ruling, we just wanted to be sure you include this in your year-end planning and speak to a qualified accountant or CPA for further details with regards to preparing your corporate tax returns. Infinium can provide you with referrals to excellent CPA’s if you do not currently have one.

Keep your ears and eyes open to what’s happening in our government as what happens over the next month or so may well define whether businesses receive relief from this additional tax burden in an already tough year.

If you have any questions about the PPP forgiveness process, please don’t hesitate to contact Infinium HR.