Guidance by IRS Limits Deductibility for Expenses from PPP Loans
When business owners first applied for loans from the Paycheck Protection Program (PPP), they did so with the expectation that they could seek forgiveness for some or all of it. In effect, this would make it a “free” loan, allowing businesses to continue functioning despite the economic impact of the coronavirus pandemic. Unfortunately, the IRS has decided to deliver some bad news to PPP recipients right before the holidays, announcing that expenses from a PPP loan that a recipient expects to be forgiven cannot be deducted from their taxes. The latest IRS ruling will most likely make this taxable event occur for 2020.
What does this guidance say?
Normally, many of the expenses that are intended to be paid by PPP loans would be considered tax-deductible under IRS regulations. However, the IRS has ruled that, due to the wording of the CARES Act, the expenses used to claim forgiveness under the PPP program cannot also be claimed for tax deductions. This is because the debt forgiveness from a forgiven PPP loan is not considered “gross income” under the wording of the CARES Act, and thus does not benefit from typical tax deductions.
The IRS also noted that this applies to PPP loans even where a recipient has yet to apply for loan forgiveness. Instead, it applies in all cases where someone has a “reasonable expectation” of forgiveness. In other words, even people who have yet to apply for forgiveness for their PPP loans do not get to benefit from tax deductions for applicable business expenses, so long as they have good reason to believe they will receive loan forgiveness.
How does this impact PPP recipients?
This is potentially a significant financial blow for PPP recipients, who may have expected to be able to deduct these business expenses as normal, in addition to the benefit of receiving loan forgiveness for their PPP loans. As a result, many of these business owners are now potentially facing significantly higher taxes than they may have been expecting when tax season rolls around.
If you have received a PPP loan and have either received forgiveness or believe you will receive forgiveness, you should contact the tax advisers at KVLSM LLP. Our team will work with you to minimize your tax liability, and work with you to protect your financial interests. For more information Download the IRS Guidance or call us (516) 294-0400. As always, should you have any questions or concerns regarding your situation please feel free to call.