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PPP Loan Expense Deductibility

The Holiday Seasons are upon us and many of us are trying to figure out how to navigate the Holidays amid a Pandemic. While we have been figuring out how to manage gatherings with family and friends the United States government has been trying to figure out how to help those who have been so deeply impacted by the Pandemic.

On Monday December 21, 2020, the House of Representatives and Senate approved the COVID-Related Tax Relief Act of 2020 (COVIDTRA). This act is an extension of the Coronavirus Aid, Relief, and Economic Security Act (CARES) that went into law in March of 2020.

Under the CARES Act a recipient of a PPP loan was able to use the loan proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations. If a PPP loan recipient used their PPP loan to pay those costs, they can have their loan forgiven in an amount equal to those costs. PPP loan forgiveness would not give rise to taxable income and generally does not allow a taxpayer to deduct expenses that are paid with tax exempt income.

The IRS issued Notice 2020-32 in April of 2020 that specifically clarified that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act. Then in November of 2020 the IRS issued Rev. Rul. 2020-27 which held that taxpayers computing taxable income based on a calendar year 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 based on eligible expenses paid or incurred during the covered period.

The good news is that with the passing of the COVIDTRA Act taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and the tax basis and other attributes of the borrower’s assets will not be reduced because of the loan forgiveness (this essentially reverses the IRS’s prior notices). It should be noted that this provision applies to PPP loans under the CARES Act and under the new COVIDTRA Act. The passing of the COVIDTRA Act is great news for small businesses as many continue to struggle with the results and actions taken by State and Local governments along with health departments to reduce public gatherings.

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