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U.S. Treasury Department and IRS Issue Guidance Clarifying the Deductibility of Expenses Where a Business Received PPP Funding

December 1, 2020

The U.S. Treasury Department and Internal Revenue Service (“IRS”) released guidance which reiterates and clarifies the tax treatment of expenses where a PPP loan has not been forgiven by the end of the year the loan was received. Taxpayers cannot claim a deduction for any deductible expense if the payment of the expense results in forgiveness of a PPP loan because the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) specifically excludes income associated with the loan forgiveness.

As 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 because the taxpayer has not expended out-of-pocket expenses. If a business believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible. Given the foregoing, businesses should immediately file for forgiveness.

Under Section 1106(b) of the CARES Act, an eligible beneficiary of a covered PPP loan can receive forgiveness on the loan in a sum equivalent to the sum of payments made for the following expenses during the covered period beginning on the covered loan’s commencement date: (1) payroll costs; (2) any payment of interest on any covered mortgage obligation; (3) any payment on any covered rent obligation; and (4) any covered utility payment. Section 1106(i) excludes gross income from any amount forgiven under the PPP.

According to United States Secretary of the Treasury, Steven T. Mnuchin, “[t]hese provisions ensure that all small businesses receiving PPP loans are treated fairly, and we . . . encourage borrowers to file for loan forgiveness as quickly as possible.”

Please call HoganWillig’s Business Department at 716-636-7600 if you have any questions about the information discussed here, or with any other questions, you may have.