Congress Trumps IRS and Confirms Tax Deductions for Expenses Paid with PPP Loans

On December 21, 2020, the United States Congress passed the Consolidated Appropriations Act, 2021 (the “Act”). President Trump is expected to sign the Act. Significantly, the Act specifies that business expenses paid with forgiven Paycheck Protection Program (PPP) loans are tax-deductible. This supersedes IRS guidance that such expenses could not be deducted if the taxpayer reasonably anticipated the loan would be forgiven.

On April 30, 2020, the IRS issued Notice 2020-32 clarifying that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to Section 1106(b) of the CARES Act.

In November, the IRS then expanded on this position by issuing Rev. Rul. 2020-27, which held 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 Act clarifies Congress’ original intent that the PPP loan proceeds should not be taxable under any circumstances. Thus, the Act renders moot the IRS position by providing 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 [under the CARES Act].”

Congress’ action is good news for taxpayers facing 2020 “phantom income” due to the unfavorable IRS position noted above. In other words, without Congress’ recent action, taxpayers would have been subject to tax on loan proceeds that were used to pay otherwise deductible expenses.

In addition to the long-awaited tax relief, the Act also includes an additional $325 billion in aid for small businesses. The Act provides more than $284 billion to the U.S. Small Business Association (SBA) for first and second PPP forgivable small business loans and allocates $20 billion to provide Economic Injury Disaster Loan (EIDL) Grants to businesses in low-income communities.

If you have any questions about the Consolidated Appropriations Act, 2021 or your specific situation with regard to PPP loan forgiveness, contact Sam Lauricia, Matt Miller or your Weston Hurd attorney.

Related PPP Advisories:

Contact Information:

Samuel J. Lauricia III – 216.687.3361, slauricia@westonhurd.com

Matthew C. Miller – 216.687.3236, mmiller@westonhurd.com