Will Expenses Paid with PPP Loans Be Tax Deductible?
Earlier this year, Congress passed the Payroll Protection Program as a part of the CARES Act aimed at COVID-19 relief. Businesses were able to apply for, and access, funds to be used for payroll, rent, healthcare premiums, utilities, and other qualified expenses. As long as a business uses the funds for these approved reasons, they can apply for complete forgiveness of the “loan.”
While the CARES Act stipulated that PPP funds should be excluded from gross income for federal tax purposes, it did not expressly address the tax treatment of expenses paid from the funds. Many business owners have been left unsure of whether they can deduct the expenses paid with their PPP loans. This would essentially result in a double benefit, since the funds were provided free of taxation.
Now, the IRS has released Notice 2020-32 in order to clarify the federal tax treatment of PPP funds and expenses paid with that money. Their current position is that business expenses paid with forgivable loans, while normally tax deductible, will not be deductible up to the amount of the forgiven funds.
The extent to which this affects business owners will depend upon the amount of the loan funds forgiven. Those with complete forgiveness cannot deduct expenses paid with the funds, up to the exact loan amount. However, those with partial forgiveness can still deduct business expenses that were not covered by the non-forgiven portion of the loan.
Impacts of the clarification.
This situation can impact Net Operating Losses (NOLs) that a business would ordinarily carry forward into future years, as allowed by federal tax law. These businesses should adjust their projected taxable income and loss calculations, to reflect the fact that they may have fewer deductions than originally anticipated.
PPP loan forgiveness can also impact taxes at the state and local levels. Each state and municipality will determine their own method of proceeding in light of these changes. In California, forgiven PPP loans are currently counted as taxable income, and should therefore allow the deduction of expenses paid with the funds. However, the state of California is still reviewing the CARES Act and making further determinations with regard to taxation. Before making any assumptions, consult your business planning attorney and tax advisor for updated advice on PPP loans and tax treatment.