Ordinary Business Expense Deduction
2020 – 08/27 by Lori Eads, CPA
When the Paycheck Protection Program (PPP) was adopted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress made clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income as long as the proceeds were used for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting cancelled indebtedness excluded from the borrower’s taxable income.
What wasn’t immediately clear, however, was whether those expenses used to qualify for forgiveness would still be deductible as business expenses. We greatly hoped they would be, effectively providing more relief for businesses already suffering great hardship during this crisis. Unfortunately, IRS issued Notice 2020-32, denying borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness. Effectively, this makes the loan forgiveness fully taxable, which does not seem to be in the spirit of the stimulus benefit program.
The American Institute of CPAs and more than a hundred other business groups have written Congress and urged them to make a technical correction to fix the tax treatment of loan forgiveness on PPP loans and reverse the IRS notice denying deductibility of the expenses. As of this writing, however, the IRS notice still stands.
We point this out so that you are aware of this important issue when discuss your 2020 tax planning at the end of this tumultuous year. Depending on the amount of your PPP loan, this could be a very large consideration in determining your 2020 tax liability. Consult your tax professional to determine how this impacts your tax situation and develop a game plan to be sure you are prepared in either scenario.