Deductibility of PPP-Funded Expenses Under Consolidated Appropriations Act 2021.

The Consolidated Appropriations Act explains that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also explains that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven; the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides a comparable path for PPP2 loans as well.

While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically discuss whether the expenses used to obtain that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated 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 PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).

In November, the IRS then expanded on this position by issuing Rev. Rul. 2020-27, which held that a taxpayer computing taxable income on the basis of 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 on the basis of eligible expenses paid or incurred during the covered period.

However, contrary to the position of the IRS, Congress ultimately agreed that the PPP-funded expenses should be deductible. This is great news for businesses in the United States as it ultimately gives them a direct benefit by reducing their tax burden. If you have any questions about the deductibility of PPP expenses or other deductions, reach out to the professionals at The Center for Financial, Legal, and Tax Planning, Inc. at (618) 997-3436.