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PPP Loan Expense Deductions Now Approved

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For those who remember, the character Emily Litella used to say on Saturday Night Live, “Nevermind.” The same applies to previous IRS guidance on Paycheck Protection Program expense deductions.

Jan 7th 2021
Columnist
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The new economic relief law enacted late last year—the Consolidated Appropriations Act—clarified that expenses paid by business entities relating to loans made through the PPP are in fact tax-deductible. In doing so, the new law rendered previous IRS guidance in the form of Notice 2020-32 and Revenue Ruling 2020-27 obsolete.

Background: Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent modifications, PPP loans may be forgiven if proceeds are used over an 24-week period to cover payroll costs or other qualified expenses like employee benefits, mortgage interest and rent and utilities. To qualify for forgiveness, at least 60 percent of the proceeds must go to payroll expenses.

Normally, forgiveness or cancellation of a debt results in taxable income to the debtor. However, the CARES Act created a special tax exclusion for loans where a business files for tax forgiveness. This was one of the cornerstones of the economic recovery plan for businesses.

Because there’s no tax on a forgiven PPP loan, the IRS initially established that expenses relating to the use of PPP loan expenses aren’t deductible in Notice 2020-32. In essence, the IRS treated the situation as a tax wash. Then it issued Rev. Rul. 2020-27 stating that expenses relating to PPP loans aren’t deductible if a business reasonably believes that the loan will be forgiven in the future, regardless of whether the business has filed for forgiveness.

This ruling also created a safe-harbor rule. If a PPP loan was expected to be forgiven, but was not, the business would be able to deduct the expenses.

New law changes: The new law bolsters the PPP and adds certain new aspects. Among other changes, new PPP loans will be available to first-time qualified borrowers. Also, for the first time, businesses that previously received a PPP loan may apply for another loan of up to $2 million if the following requirements are met:

  • The business has 300 or fewer employees
  • The business has used or will use full amount of their first PPP loan
  • The business can show a 25 percent gross decline in revenue in any 2020 quarter as compared with the same quarter in 2019

Significantly, the new law also establishes that businesses may deduct expenses paid with forgiven PPP loan proceeds. This provision supersedes the previous guidance issued by the IRS and reflects the original intent of Congress, according to the opinions of numerous commentators in the tax community. The American Institute of CPAs (AICPA) has been particularly vocal in its criticism of the IRS rulings.

We will continue to provide more details on tax-related changes included in the Consolidated Appropriations Act.

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By Bobg101
Jan 8th 2021 17:19

It is interesting to note the article or PPP authority author clearly says the expenses are deductible on forgiven loans. It is silent what happens if the loan has not been applied for to become forgiven in 2020, but did in 2021. Are the exps used as a deduction and the loan converted off the books from a liability to the Retained earnings/Equity in 2020 without getting forgiveness?

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