Fortunate Enough to Get a PPP loan? Forgiven Expenses Aren’t Deductible

 

• Find out more about deductible expenses per the new IRS guidance regarding PPP loans.
• Learn about the basics of PPP loans offered through the CARES Act.
• Find out which deductions the IRS will prohibit as “double tax benefits.”
• Find out which legislators oppose the new guidelines and what may come next.

The IRS has issued guidance making clear some provisions from the CARES Act regarding PPP loans. In particular, certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. More specifically, an expense isn’t deductible if both:

• The payment of the expense results in forgiveness of a loan made under the PPP, and
• The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Think this applies to you? Fiducial has more information to help you answer your PPP loan questions.

PPP loan basics

The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations.

A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments.

Also, the law provides that any forgiven loan amount “shall be excluded from gross income.”

Deductible expenses

So the question arises: If you pay for the above expenses with PPP loan funds, can you then deduct the expenses on your tax return?

The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees make up typical trade or business expenses for which a deduction generally applies. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness. This includes interest paid or incurred on a mortgage obligation of a trade or business.

No double tax benefit for your PPP loan

In IRS Notice 2020-32, the IRS clarifies that they will allow no deduction for an otherwise deductible expense if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act. Additionally, the Act excludes the income associated with the forgiveness from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”

More possibly to come

Two members of Congress say they oppose the IRS stand on this PPP loan issue. Senate Finance Committee Chair Chuck Grassley (R-IA), as well as his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment. Neal said it doesn’t follow congressional intent. He plans to seek legislation to make certain expenses deductible. There may be more news to come, so stay tuned.

Have questions about your PPP loan and associated taxes? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!

For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.