Double tax advantage: expenses paid from PPP funds are now tax-deductible | McAfee & Taft
After months of uncertainty, there are now clear guidelines from Congress and the IRS on business expense deductibility for small businesses that have received portions of a covered loan under the Paycheck Protection Program of the CARES Act. The legislation, which took effect on December 27, 2020, reverses previous IRS guidelines and specifically allows deductions for otherwise deductible expenses paid with PPP funds, even if the PPP loan is waived later.
The CARES Act explicitly commented on some specific tax consequences, but is silent on whether certain business expenses paid with PPP funds that are ultimately waived are deductible as no income is reported in connection with the PPP loan waiver. So the question remained: was Congress trying to give small businesses a double tax benefit by adopting the Paycheck Protection Program, or was the lack of clear, specific language in CARES on business deductibility just an oversight?
In an effort to clarify where the law is silent, the IRS subsequently issued three notices – Notice 2032-32 in April 2020 (discussed Here) and Revenue Disposal 2020-27 and Revenue Procedure 2020-51 in November 2020 (discussed Here).
Congress expressly allows double taxation benefits
Congress subsequently passed the COVID-related Tax Relief Act of 2020 as part of the Consolidated Appropriations Act 2021 (CAA), which went into effect on December 27, 2020, repealing the previous IRS guidelines and addressing matters related to this ongoing uncertainty have been clarified, and taxpayers will receive additional relief in view of the ongoing COVID-19 pandemic. Congress explicitly confirmed that there is no income offset due to the waiver of a PPP loan and further clarified that deductions will not be denied because expenses were paid with covered loan proceeds that were subsequently waived and excluded from income. In particular, Section 276 of the Tax Relief Act expressly provides that “no deduction may be refused, no tax attribute may be reduced and no increase in the assessment base may be refused due to exclusion from gross income”.
In order to comply with the newly enacted provisions of the CAA, the IRS issued Revenue Ruling 2021-2 on January 6, 2020. This new rule specifically repealed its previous position and confirmed that amounts spent on otherwise deductible expenses would be applicable in the case of. Adoption of a PPP loan under the CARES law is still deductible.
Next steps for taxpayers
The provisions on the deductibility of expenses are retroactive and apply to each tax year that ends after the CARES Act comes into force. Because the actual impact of these provisions may vary from taxpayer to taxpayer, PPP loan recipients should seek advice from a tax professional for advice specific to their circumstances.
