IRS says PPP loan forgivable expenses are not deductible
3 minute read
The IRS issued unwelcome news that certain deductions aren’t allowed for Paycheck Protection Program loans. They clarified that an expense is not deductible if the following if both of the following are met:
- 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 CARES Act.
What are the PPP basics?
The CARES Act allows a business owner who received a PPP loan to use the money to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities, and interest on other existing debt obligations.
The owner is eligible for forgiveness of the loan equal to the payments made for the following expenses during the 8-week “covered period” that begins on the loan’s origination date:
- payroll costs
- interest on any covered mortgage obligation
- payment on covered rent
- covered utility payments
The law provides that any forgiven loan amount “shall be excluded from gross income.”
So, if you pay for these expenses with PPP funds, can you 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 comprise typical trade or business expenses for which a deduction generally is appropriate. The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
Is it a double tax benefit?
In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law. The Notice states that “this treatment prevents a double tax benefit.”
Have we heard the end of this?
Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and 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, and he’ll seek legislation to make certain expenses deductible.
Our team will continue to monitor the situation and provide updates when they become available. In the meantime, if you have questions about the latest guidance or need assistance with a COVID-19 issue, JLK Rosenberger can help. For additional information, call us at 949-860-9893 or click here to contact us. We look forward to speaking with you soon.