Forgiven PPP loan recipients ineligible for tax deductions

Employers who have their Paycheck Protection Program loan forgiven will not be able to deduct business expenses paid for through those funds, the IRS has announced.

Under the PPP – a loan program designed to help small businesses in the coronavirus pandemic – employers wouldn’t have to repay the low-interest loan they received if the loan was used to pay essential expenses, including payroll.

Ordinarily, wages are deductible expenses, and forgiveness of debt is taxable income.

But under the CARES Act, PPP loan forgiveness will not be taxable income. IRS Notice 2020-32 states that any expense related to forgivable loans through the PPP won’t be tax-deductible in order to prevent what it termed a “double tax benefit.”

The agency pointed to Section 256 of the tax code, which says that deductions can’t be taken if they are tied to a certain class of tax-exempt income.

Congress has the option to override the IRS by passing legislation that would allow the deductions, but it has not indicated that change is coming soon. In the past, Congress passed laws that allow certain groups – including religious leaders and members of the military – to make some deductions even when they receive tax-free housing allowances.

PPP loans are largely expected to be allocated toward payroll expenses (75%), but the remaining 25% can be put toward rent, mortgage interest, utilities, and interest on other debt obligations.

Recipients are eligible for complete forgiveness if they maintain staffing numbers and salaries during the 8-week period after the borrower receives the funds.

There are many intricacies of the PPP and a variety of ways it could affect your business. If you have questions, reach out to a professional at KraftCPAs.

© 2020

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