PPP Expense Deductions and Forgiveness of Loans

The Paycheck Protection Program (“PPP”) came as a savior to many small businesses struggling to pay certain expenses amidst the global COVID pandemic. In addition to the preferential loan terms and lack of personal guarantees, PPP loans carry a unique forgiveness characteristic, in that if a borrower uses the PPP loan funds on certain expenses, in a certain period, they can apply to have the whole loan forgiven. What’s more, the forgiven PPP loan would not be includable in the borrower’s gross income by reason of forgiveness of indebtedness income.

While the potential for “free money” came as welcome news, many borrowers were originally met with a contradictory IRS position. In early 2020 the IRS issued Notice 2020-32, in which it took the position that no deduction would be allowed for an expense paid with PPP funds that was later forgiven. While this interpretation of the law and IRC § 265 seemed reasonable to many, some expressed great concern over the spirit of the law and confusion that could result from the IRS’s position.

However, on December 27, 2020 President Donald Trump signed the Consolidated Appropriations Act, 2021 into law. Therein Congress gave additional PPP loan forgiveness guidance. Specifically, the law provides that no deduction shall be denied, no tax attribute reduced, and no basis increase can be denied by reason of the PPP loan forgiveness that otherwise gets excluded from a borrower’s gross income.

Did the Consolidated Appropriations Act, 2021 Answer All the Questions?

Not quite. Unfortunately, many questions still remain regarding PPP loan forgiveness and the relationship to excluded cancellation of debt income and related expense deductions. For example, timing differences with forgiveness not being allowed until 2021 may create problems for borrowers that incurred 2020 costs. Amended returns may be required, and unexpected consequences of lower adjusted gross incomes may exist.

What Should I do if I need Help?

The IRS has issued some guidance, and all reasonably expect more to be forthcoming as the PPP loan forgiveness issue continues. This is especially true as many borrowers now consider their PPP Second Draw. In the meantime, McLaughlin Legal, APC is willing and able to assist with various PPP and related tax issues.

McLaughlin Legal, APC is a tax law firm with a special focus on tax litigation and controversies. If you have questions or issues related to PPP loan forgiveness or deductions based on loaned funds, please do not hesitate to contact us.

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