Treasury: Unforgiven PPP Loan Expenses Not Deductible

Businesses hoping to benefit from tax deductions for expenses related to a Paycheck Protection Program loan are going to be disappointed.

The Internal Revenue Service and the U.S. Treasury Department released guidance Wednesday clarifying the tax treatment of expenses when a PPP loan has not yet been forgiven by the end of the year.

And the news isn’t good for business owners: Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible, the treasury department said in a release.

Laura Arens, tax director of DKSS CPAs + Advisors, with offices in Troy and St. Clair Shores, Mich., was disappointed in the guidance.

“While the IRS has issued its clarification, CPAs and other industry associations have been pushing Congress for relief,” Arens said. “We need to pressure Congress into passing legislation so businesses can deduct these expenses. There is still hope that will happen.”

Treasury’s release also says that, if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. 

Treasury officials are encouraging businesses to file for forgiveness as soon as possible.

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In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses. 

“Today’s guidance provides taxpayers with greater clarity and flexibility,” said Secretary Steven T. Mnuchin.  “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”

The revenue ruling, Rev. Rul. 2020-27, provides guidance on whether a business that has received a PPP loan who has paid or incurred certain otherwise deductible expenses can deduct those expenses if there’s a reasonable expectation  of forgiveness of the covered loan, treasury officials said in the release.

The IRS and the Treasury also recently released guidance in Notice 2020-32 about deducting expenses for PPP loans. The notice clarifies that no deduction is allowed under the Tax Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of the loan under the CARES Act, and the income associated with the forgiveness is excluded from gross income.

The guidance didn’t make the leaders of the U.S. Senate Finance Committee happy, either. Chairman Chuck Grassley, a Republican from Iowa, who recently announced he tested positive for COVID-19, and ranking member Ron Wyden, a Democrat from Oregon, objected to the Treasury Department guidance.

“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income.

“As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”

According to The Hill, Grassley and Wyden indicated they’d continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time.

“We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they said.