- You did not pay taxes on the forgiveness amount, and
- You could deduct the expenses you paid with the PPP money
In late April, the IRS issued Notice 2020-32, which asserts that PPP loan recipients may not deduct business expenses paid using the PPP monies that gave rise to forgiveness (defined payroll, rent, utilities, and interest).
In a May 5, 2020, letter to Secretary of the Treasury Steve Mnuchin, Senator Chuck Grassley (chair of the Committee on Finance, Senator Ron Wyden (ranking member on the Committee on Finance), and Congressman Richard E. Neal (chair of the Committee on Ways and Means) jointly stated that the IRS got this wrong and that the intent of the CARES Act was for the PPP to be a tax-free grant.
The IRS was unmoved by the lawmakers’ letter. Their position was clear: no deduction for expenses paid with the PPP money. The IRS understood that perhaps lawmakers did not mean for that to happen, but in the eyes of the IRS, the way lawmakers enacted the law created the problem. To fix it, lawmakers simply need to pass a new law. So far, that has not happened.
On November 18, the IRS drove two nails into the coffin regarding deductions for PPP monies that were forgiven and spent on payroll, rent, interest or utilities.
- In Revenue Ruling 2020-27, the IRS ruled that you may not deduct expenses paid with the PPP loan monies if you have received or expect to receive forgiveness of those monies
- In Revenue Procedure 2020-15, the IRS set forth safe-habor procedures to follow if your PPP forgiveness is subsequently denied, or if you decide not to apply for forgiveness.
The Effect on You
You continue to come out ahead if you cannot deduct some or all of the expenses you paid with PPP money. Remember, you do not pay taxes on the income. You just cannot deduct the expenses.
Proprietors and Partners
The self-employed taxpayer with no employees has his or her loan forgiven based on his or her 2019 Schedule C net income. There’s no spend on payroll.
In its three “you can’t deduct it” judgments, the IRS gives no guidance on how it will treat the money spent by Form 1040 Schedule C filers other than any spent on rent, interest, or utilities – which of course, would be non-deductible. But most proprietors with no employees obtain full forgiveness with no spend on rent, interest or utilities.
For now, it appears Form 1040 Schedule C filers have the equivalent of the Monopoly game’s “get out of jail free” card. The same is true of partnerships and distributions to partners.
Potential Trouble for Your Section 199A Deduction
Based on what we know now, if your Section 199A deduction depends on payroll, your inability to deduct payroll costs paid with PPP money will cost you some of your Section 199A deduction.
What You Can Do
Join with hundreds of thousands of business taxpayers and tax professionals who are urging lawmakers to fix the non-deductibility issue. To help encourage action, get in touch with your state’s lawmakers.
- S. 3612 is the Senate bill to make the PPP forgiveness money used to pay business expenses tax-deductible. To express your opinion, contact your senators. You can find them at this link: https://www.senate.gov/senators/contact.
- H.R. 6821 is the House bill to make the PPP forgiveness money used to pay for business expenses tax-deductible. To express your opinion, contact your representative. You can find him or her at this link: https://www.house.gov/representatives.