Latest COVID-19 Legislation Provides Tax Deductibility of PPP Expenses
by Jill Clark
After months of Congressional negotiations and only weeks after the IRS confirmed their position that expenses paid with forgiven PPP loan proceeds were not going to be deductible, American taxpayers that took out PPP loans can finally breathe a sigh of relief. On December 22, 2020, it is anticipated that President Trump will sign the Consolidated Appropriations Act, 2021 into law.
While this latest round of legislation will likely cause many more questions to be asked, it does finally provide an answer to the question: “Are the expenses associated with PPP loan forgiveness tax deductible?” And the answer, according to this latest legislation, is “Yes”.
The behemoth 5,593-page Consolidated Appropriations Act, 2021 includes a provision that allows expenses paid or incurred using PPP loan proceeds to be deductible from taxable income, even if the loan is eventually forgiven. This provision not only applies to the second round of PPP loans made available in this latest legislation, but also retroactively applies to those loans taken out under the CARES Act.
Many have argued this was the intent all along based on the language that was included in the CARES Act that very clearly stated that any loan forgiveness related to PPP loans is excluded from taxable income. However, the IRS has stood strong in their position that while the forgiven loan proceeds are not taxable income, long standing provisions within the tax code would prohibit the deduction of any expenses associated with the forgiven loan amounts. Thankfully, this latest round of legislation confirms the original Congressional intent and gives taxpayers the long-awaited clarity they have so desperately needed.
In addition to providing for the deductibility of the expenses, the legislation also contains a provision that states that the tax-exempt income associated with PPP loan forgiveness will give partners and shareholders basis in their partnership and/or S-Corporation investment(s). This additional language helps ensure that taxpayers will not have any long-term tax consequences related to their PPP loan forgiveness upon subsequent distributions from or upon liquidation of their investment(s).
While many things remain uncertain as we close the books on 2020, we hope this one point of clarity will bring a bit of relief to those taxpayers that have been impacted by this one small, yet very significant, question.
If you have any questions about how these provisions may impact your business, please do not hesitate to reach out to your trusted BRC advisor.