COVID-19 UPDATE: IRS Releases Guidance on Deductibility of Business Expenses Paid with Forgiven PPP Loan Funds

The IRS released important guidance yesterday clarifying how it will treat Paycheck Protection Program (PPP) funds. Although a lot of the uncertainty and discussion around the PPP loan program has focused on questions about the as-yet-unreleased SBA criteria that will be used to evaluate applications for PPP loan forgiveness until now there was also ambiguity about how the IRS would handle these loans. The statute explicitly states that any loan proceeds which are forgiven will not be considered gross income. But beyond that, it was unclear how the IRS would handle deductions.

This notice clarifies that the IRS will not allow a borrower to claim a deduction for any expenses that are paid using forgiven PPP loan funds. For example, if a business would normally deduct rent payments or utility payments from its gross income when filing taxes, they will not be able to deduct those expenses from their 2020 gross income if the expenses were (i) paid using PPP loan proceeds and (ii) the SBA forgives that portion of the PPP loan.

The policy rationale behind this notice is consistent with other prohibitions for “double-dipping” in the implementation of the PPP loan program. For example, the IRS already clarified that a borrower cannot overlap PPP loan forgiveness and Families First Coronavirus Response Act (FFCRA) refundable tax credits for sick or family leave. In this instance, the forgiven PPP loan proceeds will not count as gross income of a borrower.  Thus, to allow a borrower to use the tax-exempt forgiven loan proceeds to pay an otherwise deductible expense and then actually claim a tax deduction of those expenses would result in a windfall to the taxpayer, in the IRS’ view.

For more information, contact Tony Sayess.

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