May 1st, 2020

What are Tax Implications of PPP Loans?

If your business was a recipient of a Payment Protection Program (PPP) Loan, you’re likely using it to cover businesses expenses, such as wages or rent. While these expenses are otherwise tax deductible, can they be counted as such for 2020 tax filings? What are tax implications of the PPP Loan?

Avoiding a double-tax benefit

On Thursday, April 30, the IRS issued a formal Notice stating “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”

It seems that Congress may have intended for PPP Loan funds to be forgiven without reducing deductions, due to the fact that lawmakers specifically wrote into the law that the forgiveness of any proceeds would not be Cancellation Of Indebtedness income. However, the recent IRS Notice is clear that businesses cannot both (1) receive loan proceeds that are forgiven and thus do not need to be repaid and (2) deduct the expenses for which those proceeds were used.

Will PPP Loans affect business tax deductions?

The IRS could be exploiting a gap that Congress simply forgot to address in its quick creation and passing of CARES Act funding. A Bloomberg article noted Congress failed to specify whether or not businesses could deduct expenses covered by PPP Loans, specifically that “the tax code permits companies to write off businesses expenses, such as wages, rent and transportation expenses, but generally doesn’t allow write-offs for tax-exempt income.”

If Congress did, in fact, intend to allow businesses to deduct these expenses even if they were paid with loan proceeds that were later forgiven, then it is reasonable to expect that Congress may enact a new law that addresses the issue highlighted in this recent IRS Notice.  However, until then, business owners must operate under the assumption that they will not be able to deduct these expenses on their 2020 tax returns to the extent that they were paid with proceeds from a PPP Loan that was forgiven.

Our Tax Law team and Business Services Group will continue to follow developments in PPP Loan tax implications, advising clients as such and providing updates to this blog.

As members of Gross McGinley’s Business Services Group and Tax Law teams,  Michael Henry and R. Nicholas Nanovic provide tax and legal guidance to businesses and individuals throughout the Lehigh Valley.