The Paycheck Protection Program (PPP) provides a Small Business Administration (SBA) loan that helps businesses keep their workforce employed during the Coronavirus (COVID-19) crisis.
The SBA will forgive loans if all employee retention criteria are met and the funds are used for eligible expenses. Eligible expenses can cover payroll costs, mortgage interest, rent, and utilities.
In general, when all or part of a loan is forgiven, it gives rise to cancellation of debt income. This principle would have applied to loan forgiveness under a PPP loan, but Section 1106(i) of the CARES Act states that the amount of loan forgiveness is excluded from gross income. This aspect of the loan program has led to confusion as to what to do with the covered expenses. Are they deductible or not?
In three separate announcements, the Internal Revenue Service has doubled down on its position that taxpayers cannot claim a deduction where the expense is related to forgiveness of a PPP loan where the forgiveness is excluded from gross income. This technical position is grounded in the tax policy of symmetry which attempts to match expenses with related income. All three announcements deal with various aspects of PPP loan forgiveness but are consistent in reiterating that PPP-funded expenses are nondeductible. The Service believes both tax-free forgiveness and deductibility would be a double benefit.
On the political front, the leaders of the Senate Finance Committee, Chairman Chuck Grassley (R-Iowa) and ranking member Ron Wyden (D-Oregon), took issue with the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving PPP loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement issued on November 19. Grassley and Wyden said they would continue their efforts in any year-end legislation to provide relief to the small businesses that need it most. Separately, the American Institute of Certified Public Accountants (AICPA) announced that it believes that the Service’s interpretation denying deductions is contrary to Congress’ intent.
Stay tuned, because there are only a few days left for legislative action this year. If you have any further questions regarding tax deductibility as it relates to PPP loans, please contact Alvan Bobrow.