PPP Loan Expenses Are Now Tax Deductible

If you or your business received funds from the Paycheck Protection Program (PPP), the recently passed Emergency Coronavirus Relief Act of 2020 will help to dramatically cut your tax bill. Here’s what you need to know.

Background

The PPP program was created by the CARES Act in March 2020 to help businesses which were adversely affected by the COVID-19 pandemic. Qualified businesses could apply for and receive loans of up to $10 million. Loan proceeds could be used to pay for certain expenses incurred by a business, including salaries and wages, other employee benefits, rent and utilities.

If your business used at least 60% of loan proceeds towards payroll expenses, the entire amount of the loan would be forgiven.

The Dilemma

While the CARES Act spelled out that a business’s forgiven PPP loan would not be considered taxable income, the legislation was silent about how to treat expenses paid for using PPP loan proceeds if the loan was ultimately forgiven.

Congress intended for these expenses to be deductible for federal tax purposes. But since the legislation was silent on this issue, the IRS deemed these expenses to be nondeductible through numerous IRS notices and rulings throughout 2020.

Resolution

Congress overruled the IRS’s position within the Emergency Coronavirus Relief Act of 2020. The bill officially makes deductible for federal tax purposes all expenses paid for using proceeds from a forgiven PPP loan.

So for example, if your business has a $100,000 PPP loan and uses payroll expenses to substantiate getting the loan forgiven, you can still use those same payroll expenses to reduce your taxable income.

The recently-passed bill is more than 5,000 pages long, so stay tuned for updates as to how this new legislation affects your business.

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