It’s been nearly a month and half since the Coronavirus Aid, Relief, and Economic Security Act (CARES) established the Paycheck Protection Program (PPP). In the time since, countless businesses across the country have applied for aid. Congress has also passed the Paycheck Protection Program and Health Care Enhancement Act, which added an additional $320 billion in funding after the first $349 billion was allocated.
During this time, there have been various criticisms of the program, with many questions coming from small business owners. Many tax experts and economists also have unanswered questions regarding the program. One of the most asked questions is, will small businesses who have received PPP loans be allowed to deduct expenses?
Deductibility For PPP Expenses
While the CARES Act does contain language that specifically excludes loans forgiven under the PPP from being taxable income at the federal level, it also conflicts with other areas of tax code, which initially led to confusion amongst small business owners and tax officials alike.
Specifically, Section 265 of the tax code states that businesses cannot deduct expenses associated with tax-free income. This creates conflict because tax-free loan forgiveness without deductions is the same as allowing deductions when forgiven loans are treated as taxable income.
Following the initial confusion, the IRS issued a notice on April 30 which said small businesses couldn’t deduct expenses if they receive a PPP loan. Specifically, it states that deductions are not allowed “for an expense that is otherwise deductible if the
payment of the expense results in forgiveness of a covered [PPP] loan…”
However, on May 5, lawmakers introduced S.3612, a bill which, if passed, would enable small businesses to deduct expenses, effectively invalidating the IRS notice.
Also on May 5, several sponsors of the bill sent a letter addressed to Treasury Secretary Steven T. Mnuchin, in which they noted that the guidance from the IRS on April 30 is contrary to Congressional intent when the PPP was created.
In the letter, the sponsors stated “Providing assistance to small businesses, only to disallow their business deductions… reverses the benefit that Congress specifically granted by exempting PPP loan forgiveness from income.”
The bill was referred to the Committee on Finance for further consideration.
In the meantime, the guidance from the IRS stands, and until the fate of S.3612 is decided, small business owners will need to keep that in mind moving forward. However, the ultimate answer to the question of deductibility is still left unanswered.
And, if you think it’s unclear at the federal level, the next question is – how will the states treat the deductibility issue? Stay tuned. Hopefully once the dust settles and a decision is reached at the federal level, the states will weigh in on guidance. We expect it to be a mixed bag, with some states conforming to federal rules, and others not.
Do You Have Questions About the PPP?
As developments for the CARES Act and PPP continue to come, we will be keeping a close eye on the situation and will be providing updates as the situation continues to evolve.
If you would like to know more about pending legislation regarding the PPP and how it could impact your business, please contact us today. We’re happy to clarify any multi-state or PPP/CARES tax issues you’re trying to navigate.
As always, we wish you and your family continued good health and safety.
