By: Ashleen Sahni
The Paycheck Protection Program (PPP) was created in March 2020 to help small businesses maintain their workforce and remain operational during the coronavirus (COVID-19) pandemic. On November 18, 2020, the Internal Revenue Service (IRS) stated that businesses cannot deduct expenses paid with PPP funds on their 2020 business income tax returns. As of Sunday, December 27, 2020, a COVID-19 relief bill replaces IRS guidance and enables businesses to deduct expenses paid with PPP funds. Application of this rule may vary by state. We provide the remainder of this article for your historical reference.
The IRS has finally clarified with Revenue Ruling 2020-27 and Revenue Procedure 2020-51 that expenses paid using PPP loan proceeds cannot be deducted on business tax returns. Even if a borrower’s PPP loan is not forgiven before the end of financial year 2020, they cannot claim a deduction on expenses paid with PPP funds if they can reasonably expect that their loan will be forgiven. This rule effectively increases net business income for impacted businesses.
Deducting ppp paid expenses: a safe harbor
There is a safe harbor for businesses to claim a deduction for expenses paid in 2020 with PPP funds if:
- They expect their PPP loan to be forgiven in a taxable year after 2020, and in that future taxable year, their request for PPP loan forgiveness is partially or fully denied,
- Or they do not apply for loan forgiveness at all.
These borrowers can claim deductions on their original income tax returns, amended tax returns for 2020, or on subsequent tax returns.
PPP loans are eligible for forgiveness when certain conditions are met, such as maintaining a business’s workforce at pre-COVID-19 levels and spending a certain proportion of loan proceeds on payroll costs.
Certain businesses will be able to deduct expenses paid with PPP funds on their 2020 taxes. Please contact your experienced Chugh, CPAs LLP professional to learn more about the relief available to your business.