PPP Loan Forgiveness: Authorized Expenses Paid With PPP Money Are Deductible

Many of our readers took advantage of the Paycheck Protection Program (PPP), which offered forgivable loans to businesses that were wiling to use the money for payroll purposes.

One open question was the tax treatment of the covered expenditures. An IRA Notice explained that the expenses would not be deductible, which reduced the total value of the PPP forgiven loan. That issue has been resolved in the recent Omnibus Bill. This issue presents itself like this:

• First, under normal circumstances, loan forgiveness is taxable. You treat it like taxable income.
• Second the CARES Act explicitly provided that loan forgiveness for CARES Act PPP loan forgiveness would not be taxable as income.
• Third, the IRS released an interpretation – IRS Notice 2020-32 – explaining that although the PPP loan forgiveness would not be taxable as income, the payroll and other expenses paid with this money would also not be deductible. This was based on 26 U.S.C. § 265. You can see a complete analysis in our earlier article, here. For most taxpayers, this yielded the same result as if the PPP loan forgiveness had been taxable as income, and the payroll and other expenses had remained deductible.
• Finally, this issue was resolved in the recent legislation, which confirmed that:
  • The CARES Act PPP loan forgiveness would not be taxable as income, as originally intended; and
  • The authorized expenses paid for with the forgiven PPP loan funds would remain deductible, without regard to 26 U.S.C. § 265.

In general, this means that the once the PPP loan has been forgiven, it will generate no additional tax liability, and it will not affect the deductibility of your payroll and other expenses. This makes PPP Loan forgiveness even more valuable to the taxpayers that receive it.

For those who apply for a second draw PPP (which will soon become available), comparable forgiveness and deductibility rules will apply. Se our article on the second draw PPP for more details.

This statutory authority can be found in Division N, Section 276 of the Omnibus bill (the particular subtitle is known as the ‘‘COVID-Related Tax Relief Act of 2020’’). You should review this authority with your tax accountant to understand how it affects your particular tax situation.