IRS Issues Clarification on Deductibility of PPP Loan Expenses

Entrepreneurs who took a PPP loan this year cannot write off certain expenses on their taxes if they expect the debt will be forgiven, according to the IRS and Treasury Department. The two agencies have issued guidance to clear up the tax treatment of expenses when a loan from the Small Business Administration’s Paycheck Protection Program hasn’t been forgiven by the end of the year.

The IRS and the Treasury issued both a revenue ruling and a revenue procedure, essentially saying that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible. The IRS notes that this results in neither a tax benefit nor harm since the taxpayer has not paid anything out of pocket.

“This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket,” said the Treasury in a news release. “If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible.”

The IRS also notes that in cases where a PPP loan was expected to be forgiven, but it is not, businesses will be able to deduct those expenses. However, if a “business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”

Recently released guidance in IRS Notice 2020-32 further clarifies deducting expenses for PPP loans. The notice make clear that no deduction is allowed under the Tax Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the CARES Act, and the income associated with the forgiveness is excluded from gross income.

Talley’s professionals have spent hundreds of hours reviewing the law, regulations and SBA PPP FAQs issued on an almost daily basis and we are happy to assist you in the process. We are available to simply answer a quick question or assist in the application and/or forgiveness audit process.

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