If you are subscribed to our newsletter, you may know that last week, the Internal Revenue Service issued a notice clarifying that expenses paid with the Paycheck Protection Program (PPP) loan proceeds are nondeductible for tax purposes to the extent the PPP loan is later forgiven. This notice follows the second round of PPP loans meant for small businesses who are in need of financial assistance during this difficult time.
Under section 1106 of the CARES Act, those who qualify and are approved for the PPP loan are eligible for forgiveness of up to 100% of the costs incurred and payments made during the 8-week period. It is meant to cover payroll costs and mortgage interest, rents, and utilities.
The CARES Act specifically states that it excludes PPP loan forgiveness from taxable income but does not mention the deductibility of expenses paid with the loan proceeds. According to the notice, under the Internal Revenue Code and existing guidance, the loan proceeds that are forgiven under the PPP are considered exempt income, and expenses that are allocable to that exempt income are nondeductible.
What does this mean?
Payroll, benefits, mortgage interest, rent, and utilities paid with the loan proceeds during the eight week period following the PPP loan funding date will not be tax-deductible to the extent of loan forgiveness.
Why can’t PPP loan expenses be tax-deductible?
This ensures the taxpayer does not receive a double benefit. If these expenses were deductible, the taxpayer would receive both tax-exempt income from PPP loan-forgiven amounts and tax deductions for expenses paid with those same loan proceeds. It is important to remember, however, that any operating expenses that are paid out of the PPP loan funds that are not forgiven and that have to be paid back over the subsequent two years will, in fact, be tax-deductible. This would include payroll over the $100,000 annual level, employer payroll taxes, etc.
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At Hall & Company, we are here to assist you in understanding the Paycheck Protection Program and how to maximize your eligible loan forgiveness over the next eight weeks. Please do not hesitate to reach out to us with any questions. For useful information and updates, check out our COVID-19 resources page. For more general information regarding tax and accounting news and best practices, visit out our blog.