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PPP Expenses Not Deductible in 2020

11.20.2020

The U.S. Treasury Department and Internal Revenue Service (IRS) released the following joint statement concerning the deductibility of PPP eligible loan expenses:

Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket. If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.  Therefore, we encourage businesses to file for forgiveness as soon as possible. In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.

“Today’s guidance provides taxpayers with greater clarity and flexibility,” said Secretary Steven T. Mnuchin. These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”

The IRS guidance goes further to state that expenses are not deductible in the current year even if the taxpayer has not submitted an application for the forgiveness of the covered loan by the end of such taxable year.

Congress' Reaction

The top Republican and Democrat on the Senate Finance Committee said the Treasury Department “missed the mark” in new guidance that limits tax breaks for businesses that get their PPP loans forgiven.

In a joint statement, Senate Finance Chairman Chuck Grassley and Democrat Ron Wyden said the Treasury is depriving some small businesses of much-needed economic relief by forcing them to choose between getting their PPP loans forgiven or claiming write-offs on expenses they covered with the loan money.

Congress' reaction to the guidance puts additional pressure on the Treasury and IRS to allow taxpayers to claim the expense deductions. Grassley and Wyden encouraged the IRS to reverse its position. Lawmakers say they are working to include language in year-end legislation clarifying that taxpayers qualify for expense deductions even if their loans are forgiven. Congress must pass government spending legislation by December 11 before federal funding runs out, and the clarifying language could be found in that. 

The original text of the release and IRS guidance can be found here: https://home.treasury.gov/news/press-releases/sm1187

Brown Smith Wallace PPP Loan Resources

Our CARES Act Loan Consulting team can help organizations proactively work with their lenders by applying and understanding the requirements for loan forgiveness.

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