The U.S. Senate and House of Representatives overwhelmingly passed a new $900 billion COVID-19 relief bill this week. The legislation, the Consolidated Appropriations Act, 2021, also ensures tax deductibility for business expenses paid with forgiven Paycheck Protection Program (PPP) loans.
The bill also specifies that business expenses paid with forgiven PPP loans are tax-deductible. This supersedes IRS guidance that such expenses could not be deducted and brings the policy in line with what many business associations (as well as Fiffik Law Group) have argued was Congress’s intent when it created the original PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The COVID-19 relief bill clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to loans under both the original PPP and subsequent PPP loans.
While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under the CARES Act.
In November, the IRS then expanded on this position by stating that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period. Treasury Secretary Steven Mnuchin also argued against businesses being able to deduct business expenses paid with forgiven, tax-free PPP funds, calling it an unwarranted double benefit for businesses.
The net effect of these IRS rulings would reduce the net value of PPP loans about about one-third. The 2021 legislation did away with these IRS rulings and restores the PPP Loan as basically a “grant” to businesses as it was originally understood to be and in fact was intended.
Fiffik Law Group had previously suggested that businesses who received a PPP loan wait until 2021 to apply for loan forgiveness. One reason was our hope that Congress would address the IRS rulings. Happily Congress has spoken and we recommend moving forward with loan forgiveness applications in early 2021.
Our business attorneys are available to answer your PPP loan questions.
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