The IRS has issued guidance around the tax deductibility of allowable Paycheck Protection Program expenses. In short, the IRS is disallowing any such tax deductions, and warning all PPP recipients they need to plan accordingly.
This is a significant change. Due to the evolving PPP loan forgiveness process, many businesses and their tax advisers planned to wait to apply for loan forgiveness in 2021. This way, a business could deduct their standard expense for tax year 2020, apply for PPP loan forgiveness in 2021 to evaluate how much is forgiven or deductible, then address tax liability on PPP forgiveness and deductions in later filings. This would retain working capital amid the uncertainty of current events.
However, the Department of Treasury and the IRS issued guidance Nov. 18 that says if “the 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.”
A business that received a PPP loan and paid otherwise deductible expenses such as payroll, rent, mortgage, or utilities during the covered period may not deduct those expenses for tax year 2020 even if the business does not submit an application for loan forgiveness in 2020.
If a business “reasonably expects to receive forgiveness,” it automatically loses these tax deductions.
The IRS has also noted that if the loan is subsequently not forgiven, businesses can treat these expenses as deductible in an amended filing. Companies that do not intend to seek forgiveness may deduct the expenses this year.
Some businesses are supporting a bipartisan reversal of this position, which is S.3612/H.R.6821.
Source: Dady & Gardner, P.A.