IRS Says Businesses with Forgiven PPP Loans Cannot Deduct Expenses

Filed in Disaster Response, Economics, Tax Reform by on November 19, 2020 10 Comments

Businesses that get their Paycheck Protection Program (PPP) loans forgiven will not qualify for some valuable deductions, according to IRS guidance that reiterates its position taken in April. In addition, companies that have “a reasonable expectation that the government won’t require them to pay back the money can’t deduct the business expenses paid for by the loan.”

“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,” according to a statement released by the Treasury Department.

Companies denied loan forgiveness — or which never applied for it — can still claim deductions for expenses paid for with PPP money. These include payroll, mortgage and utility costs.

Reversing the IRS position on deductibility has been a point of bipartisan agreement, with Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and House Ways and Means Committee Chairman Richard Neal (D-Mass.) supporting legislative changes that would allow businesses to deduct expenses paid for with PPP money — regardless of whether the loan is forgiven. NAHB continues to advocate for Congress to address this issue, but it remains unclear if lawmakers will act prior to the end of the year.

To get the loans forgiven, borrowers must submit an application through the lender to the Small Business Administration. The agency has as many as 90 days to review it and make a decision.

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Comments (10)

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  1. Sarita says:

    So let me get this straight, the government forces shut downs, forces companies to lose major income, tries to help some small businesses out by the loan now requires them to pay extra taxes, no fault of their own because the government realizes that they have lost income from a shut down that should not have happened. Sounds like the government needs to be a private industry and not get paid any taxes off the backs of small businesses.

    • William says:

      It’s not “extra” taxes. Since the loans will be forgiven, the taxes paid are really taxes on the free money you got. The net effect is that all companies made money on this deal. (This obviously doesn’t take into effect general economic losses, etc).

    • Adam McIndoe says:

      YOU NAILED IT SARITA!

  2. tony says:

    So basically the loan will become pure income and the amount of the loan will be taxed ? Defeats the purpose of it I would think ?

  3. steven c culp says:

    So the loan becomes net income. The effect is that you will pay income tax (as you can’t deduct the actual payroll expenses) at your current tax rate. 30-38%.

  4. Scott says:

    Why would anyone think the PPP loan would be tax free? Whether its classified as forgiveness of debt or you cannot deduct expenses paid by the PPP loan (basically the same thing), it is money you received that replaced revenue/income. If you would have made $100,000 without the pandemic you pay taxes on that income. If you made zero due to the pandemic but received $100,000 to offset from the government, you pay taxers on the same $100,000. One could argue the the losses were greater than the $100,000 and therefore there should be no taxes but the government does not have bottomless pockets and there is a shared pain. I for one am grateful for the PPP money and the home industry has not been hurt to the same level as many industries. I still get $70,000 of the $100,000 after taxes to offset impacts from the pandemic.

  5. Scott says:

    Or the forgiven PPP loan can be considered income and then the expenses become deductible.

  6. Stephen Robinson says:

    So by using it for payroll, they collect the taxes for social security and personal income tax, plus matching from employer and now we will pay 28 percent as well from our business in taxes as we cannot deduct the expenses. and depending on your tax structure it might be a huge hit. Of course there is going to be a lot of screaming from all those who collected unemployment monies when they have to pay taxes on all that. Madness.

  7. Peter C Miller says:

    Important article….I believe a majority of PPP recipients don’t have a clue about this.

  8. Larry says:

    Many businesses took PPP money even though they did not need it. They couldn’t believe it was offered. It was like the gold rush at that time. RV and boat sales went through the roof! Now they have to deal with the consequences.

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