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Tax Alert – Expenses Paid with PPP Loan are Now Deductible

Tax

Late Monday night, the House and Senate voted in favor of the Consolidated Appropriations Act, 2021 (Act) to provide direct aid to small businesses and individuals.

One of the big items many taxpayers and practitioners were looking for was a technical correction to the tax effects of the PPP loan and eligible expenses. When the CARES Act was passed in March of 2020, it was intended that forgiven PPP Loans would not be included in taxable income.

In May of 2020, the IRS issued Notice 2020-32 stating that expenses associated with the nontaxable loan forgiveness were nondeductible. There was much speculation on how and when to treat the expense add back on a 2020 return until the IRS issued Revenue Ruling 2020-27 in November. The Revenue Ruling strengthened the IRS stance on the expenses’ deductibility and essentially mandated the expenses would be nondeductible in 2020.

The Act, which has yet to be signed by the President and placed into law, clarifies the forgiven loans’ tax treatment. Section 276 of the Act states that “no deduction shall be denied” because of the loan forgiveness. This is a big win for taxpayers and CPAs going into the next filing season. 

Additional PPP related highlights in the Act include:

  • A less than 1-page certification for ‘automatic’ forgiveness for PPP loans of $150,000 and less should be available within 24 days. Keep in mind the proper documentation should be maintained, and these loans could still be subject to audit.
  • A 2nd round of PPP funding of $284 billion. Further details include:
    • Requirements of 300 employees or less and 25% decline in gross receipts for any quarter in 2020 compared to the same quarter in 2019
    • The maximum loan amount is $2 million
    • Larger definition of qualified expenditures, including costs related to dealing with the pandemic
    • 501c(6) organizations are eligible now, with limitations related to lobbying.

The bill specifies that the government has 10 days to issue the forms and additional guidance, so this program could be up and running the first week of January.