PPP Loan Tax Consequences – Robert Bell, CPA, Auditor
As you know, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th, 2020. Part of this law provided aid to businesses in the form of Payroll Protection Program (PPP) loans; which were intended to be forgivable to the extent that these loans were utilized for certain payroll-related costs. It was expressly stated that forgiven amounts under the PPP will be excluded from federal taxable income; however, no guidance was initially provided relating to the deductibility of expenses that these funds are intended for. On April 30, 2020 the Internal Revenue Service (IRS) issued Notice 2020-32 to clarify deductibility of expenses related to the PPP. The IRS has determined that a taxpayer is not allowed to deduct expenses that proceeds from forgivable PPP loans are used to pay. This clarification has essentially created tax consequences for the loan forgiveness; which was supposed to be a tax-free event.
On May 6th the Senate Finance Committee introduced the Small Business Expense Protection Act to clarify that expenses paid with forgiven PPP loans will remain tax-deductible, which was the intent of the law according to Sen. Charles Grassley, Chairman of the Senate Finance Committee. “Unfortunately, Treasury and the IRS interpreted the law in a way that’s preventing businesses from deducting expense associated with PPP loans. That’s just the opposite of what we intended and should be fixed.”
Unfortunately, as of this writing, this is only a proposed legislative correction and IRS Notice 2020-32 is still in force. This is a situation we are monitoring closely as this issue evolves.