In March, 2020, the CARES Act established the Paycheck Protection Program which provided loans (“PPP loans”) to businesses meeting certain requirements. Subject to certain limitations, PPP loan recipients are entitled to have all or a portion of the PPP loan forgiven if the loan proceeds were used for certain “covered purposes” (either within an eight-week period or a twenty-four-week period following the PPP loan’s origination date). Among these covered purposes are payroll costs, rent, and utilities – expenses that might be otherwise deductible from income. To the extent that the PPP loan is forgiven, a taxpayer is not required to include the forgiven amount in its gross income.
The CARES Act did not address whether otherwise deductible expenditures made using proceeds of a PPP loan that was forgiven could still be deducted – i.e., whether PPP loan recipients could both exclude from income the amount of the PPP loan forgiven and deduct amounts paid with respect to covered expenses. In IRS Notice 2020-32, the IRS took that position that no deduction would be allowed for such expenses.
Congress specifically addressed the treatment of such expenses in the Consolidated Appropriations Act, signed into law on December 27, 2020 (“2021 Appropriations Act”). The 2021 Appropriations Act, contrary to the position taken by the IRS in Notice 2020-32, clarified by statute that recipients of PPP loans are permitted to take any deductions that would otherwise be allowable for expenses paid with proceeds from a forgiven PPP loan. This provision provides taxpayers with a potential double benefit – potential exclusion from income of a PPP loan, as well as an income tax deduction for expense paid with the proceeds of such PPP loan.
For more information, please contact Brian Bunner in our Columbus, Ohio office at 614-744-2573 or any other attorney in our Tax Practice Group.