Clarifications on the Deductibility of Expenses for Businesses with a PPP Loan

Please note that this blog is based on laws effective in November 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.

The U.S. Treasury Department and Internal Revenue Service (IRS) released guidance on November 18th clarifying the deductibility of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received. Here are the key points from the announcement: 

  • Since businesses are not taxed on the proceeds of a forgiven PPP loan, the IRS reiterated that expenses paid with PPP loan proceeds are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.
  • If a business receives loan forgiveness during the tax year, expenses paid with PPP loan proceeds are not deductible.
  • If a business reasonably believes that a PPP loan will be forgiven in the future, expenses paid with the loan proceeds are not deductible, even if loan forgiveness does not occur during the tax year. For example, a calendar year business that reasonably believes that it will receive loan forgiveness in 2021 cannot deduct expenses paid in 2020 with PPP loan proceeds. This rule applies whether the business has filed for forgiveness or not. 
  • In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses. The same holds true for businesses that choose not to apply for loan forgiveness.

It is important to note the newly released guidance does not address taxpayers with a fiscal year.

CK’s tax department is keeping a close eye on these developments. It is possible that Congress will act to offset the Treasury’s decision on deductible expenses. As soon as we have more information we will post it on our website. In the meantime, if you have any questions about your PPP loan and the deductibility of expenses, contact us at 630-953-4900.

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