IRS Clarifies Deductibility of PPP Loan Expenses

Taxpayers who received a PPP loan need to know about a recent IRS guidance if they expect to have expenses covered under the loan agreement.

The CARES Act specifically makes the discharge of PPP loans a non-taxable transaction. Originally businesses were led to believe that for loans to be forgiven in the future, expenses for purchases could not be deducted.

The IRS said while forgiveness of the loan would be tax-free, borrowers would be unable to deduct their expenses because it would provide a “double benefit” to the taxpayer. Also, the IRS is indicating that taxable income will be a 2020 taxable event even if debt discharge is not issued by the SBA until 2021 if forgiveness is expected to be given. It is no surprise that taxpayers are asking Congress to clarify the intent or for the IRS to back off their current position.

Overall, this is another blow to PPP recipients who continue to be under attack from the IRS and SBA on the treatment of these loans.

What’s Next?

It is yet to be determined what the final conclusions will be with respect to these loans – there is a possibility that the SBA may not grant forgiveness, and there is now certainty that the IRS will consider forgiveness taxable if it is expected to occur. And business organizations and taxpayers will continue to push congressional clarification to reinstate the original intent of the CARES Act. Watch our blog for future updates.