CARES Act Revisited: Expenses Paid with PPP Loan Now Deductible

Just in time to throw our year-end tax planning on its head, Congress overwhelmingly passed a $900 billion COVID-19 relief bill just before midnight on Monday that ensures tax deductibility for business expenses paid with forgiven Paycheck Protection Program (PPP) loans. The legislation, the Consolidated Appropriations Act, 2021, also provides $600 stimulus payments to certain individuals, adds $300 to extended weekly unemployment benefits, and provides more than $300 billion in aid for small businesses.

The PPP was part of the CARES Act enacted on March 27, 2020. It provided for forgivable loans to certain businesses that met the necessary criteria. PPP loans could be used to meet payroll and other specified expenses. The Act was clear that the loans would not be taxable when forgiven. However, the IRS followed up with several notices stating that expenses paid with the forgiven loans would not be deductible. We reported that this was a backdoor way of taxing the PPP loans, and along with our colleagues in the American Institute of CPAs, objected to this treatment.

In the new Act, congress clarifies that we were right and the IRS was wrong. Included in the nearly 5,600-page Act is a simple provision stating that all expenses paid for with PPP loans, even if the loans do not have to be repaid, are now deductible.

We are studying the other tax-related and business provisions and will report on those in the coming days. In the meantime, we encourage you to reach out to your Williams Benator & Libby advisor to consider how this provision will impact your 2020 taxes.

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