Problem Solved: PPP Recipients Can Deduct Payroll Expenses

The controversy over the deductibility of payroll expenses by Paycheck Protection Program (PPP) loan recipients has finally been settled, less than a week before the end of the year. 

Deductibility is expressly provided for in the Consolidated Appropriations Act, 2021. That 5,500+ page legislation was passed by the House and the Senate on Monday, Dec. 21. President Donald Trump signed the bill Sunday, Dec. 27, 2020, with this statement:

“I am signing this bill to restore unemployment benefits, stop evictions, provide rental assistance, add money for PPP, return our airline workers back to work, add substantially more money for vaccine distribution, and much more.”

Deductions Not Previously Addressed

A key provision in the new legislation helps PPP loan recipients with the vexing question of whether payroll (and other) expenses can be deducted if paid for with PPP loan proceeds.

Accountants, lawyers and recipients had been trying to tackle this issue since the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that created PPPs in March. However, controversy followed, since the CARES Act did not address deductibility of expenses. 

The IRS’ View

The IRS, through Notice 2020-32 that was issued in late April, said deductions were not allowed for payroll expenses that were covered by PPP loans. (The forgiven loan would, however, be excluded from gross income.)

In an interview in May, Treasury Secretary Steven Mnuchin stated that “[t]he money coming in the PPP is not taxable. So if the money that’s coming is not taxable, you can’t double dip.”

In November, the IRS confirmed its position in Rev. Rul. 2020-27. That is, the IRS stated that a taxpayer could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a “reasonable expectation of reimbursement” in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period.

Meanwhile, accountants and lawyers argued for deductibility.

That has all been settled with the passage of the new act.

Congress Shines A Light On Deductibility

Section 276 of the new legislation makes clear that Congress disagreed with the IRS’ non-deductibility position.   

Here it is: Section 276, “Clarification of Tax Treatment of Forgiveness of Covered Loans”

“(a)(i)TAX TREATMENT—For purposes of the Internal Revenue Code of 1986—

“(a)(i)(1) no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in subsection (b),

“(a)(i)(2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1).”

Result

What does this language mean?

Certainty is restored. Businesses can deduct payroll and other business expenses as usual, even if these expenses are paid for with PPP loans. This lifts a huge burden for PPP recipients who were concerned with the IRS’ stance on deductibility.

Under the just-enacted law, PPP loan recipients are treated no differently than non-PPP loan recipients when it comes to taking tax deductions for business expenses. That goes for 2020 and future tax returns, whether a PPP loan recipient’s loan is forgiven this year, next year, or never. That is, the PPP loan has no impact on the deductibility of business expenses.

Additional Resources

For additional resources, read Marcum’s “COVID-19 Relief Bill Signed into Law with Tax Provisions.”

Your Thoughts

If your business received a PPP loan, send me questions you’d like addressed. Write to me at forbes@juliejason.com.