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Congress Clarifies Tax Implications of PPP Loan Forgiveness

12.22.2020

After a year of uncertainty and a myriad of unforeseen events, we have some certainty as to the taxability of Paycheck Protection Program (PPP) loan forgiveness and the deductibility of related expenses.

Late Monday, December 21, Congress passed and sent to President Trump for signature the Consolidated Appropriations Act, 2021, which includes additional stimulus for the weakened economy. As part of the package, Congress clarified its earlier intent to make loans forgiven under the PPP be non-taxable. This provides a resolution to the disagreement between the original congressional intent of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the IRS positions issued under Notice 2020-32, Rev. Rul. 2020-27 and Rev. Proc. 2020-51.

The disagreement by taxpayers and practitioners and the IRS stemmed from the IRS’s guidance that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. This was seen by many to be an indirect way of making the forgiveness of PPP loans taxable.

The new legislation removes all doubts for taxpayers and practitioners by stating that “no deductions shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion for gross income.” Meaning that the expenses are deductible and the previously issued IRS guidance is inapplicable and will be revoked. The Act not only addresses the deductibility of expenses but also provides clarification for flow-through entities by allowing PPP forgiveness to increase basis. The new legislation covers the existing PPP loans, as well as the second forthcoming round.

While the entire team at Brown Smith Wallace has been diligent in analyzing the implications and practical solutions to the disagreement between legislative intent and the IRS’s previous position, we are glad to have the clarification of the rules and a taxpayer-favorable pledge heading into the end of the year. To discuss this or any of the provisions in the new Act, please contact John Schwartze, Tax Principal, at jschwartze@bswllc.com or 314.824.5237. To learn more about our PPP services, click here.

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