Tax deductions for qualified Paycheck Protection Program expenses have been disallowed. But that could change with your help… Here’s the landscape.
In late April, the IRS issued Notice 2020-32, which asserts that PPP loan recipients may not deduct business expenses paid using the PPP monies that gave rise to forgiveness (defined payroll, rent, utilities, and interest).
From what we know, when lawmakers originally passed the PPP they thought that under its provisions,
- you did not pay taxes on the forgiveness amount, and
- you also could deduct the expenses that you paid with the PPP money.
In a letter to Secretary of the Treasury Steven Mnuchin on May 5, 2020, Senator Chuck Grassley (chairman of the Committee on Finance), Senator Ron Wyden (ranking member on the Committee on Finance), and Congressman Richard E. Neal (chairman of the Committee on Ways and Means) jointly stated that the IRS got this wrong and that the intent of the CARES Act was for the PPP to be a tax-free grant.
The IRS was unmoved by the lawmakers’ letter. The IRS position was clear: no tax deductions from expenses paid with the Paycheck Protection Program funds. The IRS understood that perhaps lawmakers didn’t mean that to happen, but in the eyes of the IRS, the way that the lawmakers enacted the law created the problem. To fix it, lawmakers simply need to pass a new law.
Frankly, we thought that lawmakers would pass a new law and take care of this problem. But no, that has not happened.
New Nails in the Coffin
On November 18, 2020, the IRS drove two new nails into the coffin regarding deductions for PPP monies that were forgiven and spent on payroll, rent, interest, or utilities.
- Nail 1. In Revenue Ruling 2020-27, the IRS ruled that you may not deduct expenses paid with the PPP loan monies if you have received or expect to receive forgiveness of those loan monies.
- Nail 2. In Revenue Procedure 2020-51, the IRS set forth safe-harbor procedures to follow if your PPP forgiveness is subsequently denied or if you decide not to apply for forgiveness.
With the rulings described above, the IRS has clarified its position to lawmakers: if you don’t like the non-deductibility of expenses paid with PPP monies, change the law.
What to Do Now
Join with hundreds of thousands of business taxpayers and tax professionals who are urging lawmakers to fix the non-deductibility issue.
To help encourage the action you desire (whether you’re for or against deductibility), get in touch with the lawmakers.
- S. 3612 is the Senate bill to make the PPP forgiveness money used to pay business expenses tax-deductible. To express your yea or nay on S. 3612, contact your senators. You can find them at this link: https://www.senate.gov/senators/contact.
- H.R. 6821 is the House bill to make the PPP forgiveness money used to pay business expenses tax-deductible. To express your yea or nay on H.R. 6821, contact your representative. You can find him or her at this link: https://www.house.gov/representatives.
Your yea or nay doesn’t need to be long or formal. You can fax, email, or phone and simply say you support or oppose the bill. It’s that easy—and it’s effective. Do it.
Paycheck Protection Program Tax Deductions Updates
Please visit New Paycheck Protection Program Forgiveness Tax Laws for a happy ending to this quick tax tale.
For a brief background on the original Paycheck Protection Program loan, please visit COVID-19 SBA Loans: EIDL & The Paycheck Protection Program.
Did you know you can qualify for both the PPP Loan and the Employee Retention Tax Credit? Please visit New COVID-19 Self-Employment & Payroll Tax Credits.
If you want help maximizing your forgiveness and tax credit amounts with tax planning strategies, and if you’re wondering about how this will affect your financial reports, please visit My Contact Page for assistance.
If you need help claiming the tax deductions and credits by preparing your tax returns, please visit my other business, Arizona Foothills Tax Accounting, for assistance.
Page Last Updated: 02/15/2021