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Trade Groups Pressure Congress to Allow Deductibility of Business Expenses Paid Under PPP

  • Trade groups protest Treasury and IRS guidance saying business expenses covered by a forgiven PPP loan cannot be deducted from a business owner’s 2020 taxes
  • Decision could result in significant tax hikes as fewer deductions would increase a business owner’s income on paper
  • Proposed economic stimulus bill would counter the decision by allowing the deductions

More than 560 business groups have urged Congress to allow business expenses paid under the Paycheck Protection Program to be deducted from business owners’ taxes. The push comes as a response to guidance from the Treasury Department and Internal Revenue Service saying these expenses cannot be deducted from 2020 taxes if the business received a PPP loan that was forgiven or is expected to be forgiven.

More than 5 million businesses received PPP funding to help address revenue shortfalls brought on by the COVID-19 pandemic. The purpose of the program was to help companies maintain staffing and payrolls, as well as expenses such as rent and utilities. In general, the loans do not need to be repaid if the company dedicated at least 60 percent of the funding to payroll, although partial forgiveness is also available.

Forgiven loans are usually treated as taxable income, although the CARES Act that established PPP specified that this would not occur with the program’s loans. However, a May update declared that if a forgiven PPP loan is not taxable, then any of the expenses the business paid in order to qualify for loan forgiveness cannot be deducted from the company’s 2020 taxes – even though these expenses are deductible in a typical year.

The shift has been widely criticized by business owners, who say the potential tax impact was not apparent when they first took the loan. Since the inability to deduct expenses would result in a higher income on paper when the the business owner files their returns, they would also be subject to higher taxes – an increase of up to 37 percent in some cases, according to the business groups.

The Treasury and IRS have not wavered from the amended position, issuing an update in November declaring, “Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.”

The guidance says that if a borrower “reasonably expects” that their PPP loan will be forgiven, then the expenses the loan covered are not deductible. It holds that this is the case whether the borrower has applied for forgiveness or not, so business owners are encouraged to apply for forgiveness as soon as possible.

Some exceptions are available to business owners. A safe haven allows those who don’t deduct the expenses but ultimately do not receive forgiveness for their loan, or decide against applying for forgiveness, to deduct the expenses on their original or amended 2020 returns, or in a future year. Self-employed individuals with no employees can also deduct expenses as usual.

While PPP has been widely hailed as playing an essential role in keeping businesses open during the pandemic, it has also come under increasing criticism for issues that have arisen since its inception. These include complex and often changing guidance on loan forgiveness, several instances of fraud, and the revelation that larger companies were more likely to benefit from the program than smaller ones.

A $908 billion economic stimulus bill proposed in Congress not only revives the PPP with $288 billion set aside to support small businesses, but also seeks to resolve problems that cropped up with the first round of funding. The measure seeks to make business expenses covered by PPP loans deductible while also simplifying the forgiveness process for loans under $150,000.

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