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IRS Disallows Deductions for Business Expenses Paid with Forgiven PPP Loan Amounts by Angie Adames, CPA

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Posted on May 12, 2020 by Angie Adames

The IRS released guidance on April 30, 2020, prohibiting businesses from deducting any normally deductible expenses they pay using funds from a Paycheck Protection Program (PPP) loan that later becomes forgiven. Businesses must consider these tax implications, and any subsequent guidance, before applying for or accepting PPP loans.

The CARES Act introduced PPP loans to provide immediate economic relief to businesses struggling to maintain workers and pay required expenses during the COVID-19 pandemic. The key benefit of this program is it allows borrowers to convert loans to forgiven grants when proceeds are used to cover payroll costs, mortgage interest payments, rent and utilities. Under the tax code, businesses may generally deduct these ordinary and necessary costs as business expenses. However, because forgiven amounts of PPP loans will not be treated as taxable income, the IRS reasons that borrowers should not be able to deduct expenses paid with tax-exempt income and receive a double tax benefit. Businesses that receive partial loan forgiveness can deduct expenses for those unforgiven amounts.

On May 6, 2020, members of the U.S. Senate introduced a bill that would reverse IRS guidance and allow PPP loan recipients to deduct the full value of business expenses paid with PPP loan proceeds, regardless of whether any portion of those loans is forgiven. As of this writing, it is not known whether the proposed Small Business Expense Protection Act of 2020 will become the law. In the meantime, businesses should abide by the IRS’s most recent guidance.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and business consulting services to real estate companies, manufacturers and closely-held entities. She can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.