Guest post from T. J. Wilkinson the Shulman Rogers Tax Law Group:
The CARES Act was amended at the end of 2020 to provide further tax benefits to taxpayers who received PPP loans. On January 6, the IRS released guidance consistent with that amendment, and obsoleted certain prior IRS guidance that disallowed certain tax benefits to PPP loan recipients.
Back in November 2020, to the disappointment of many taxpayers and certain members of Congress, the IRS released guidance disallowing certain deductions if the taxpayer received a PPP loan that was expected to be forgiven. More specifically, the guidance advised taxpayers that, to the extent a taxpayer (1) received a PPP loan and reasonably expected that loan to be forgiven, and (2) incurred certain otherwise deductible expenses that were listed as permissible expenditures of PPP loan funds under the CARES Act guidance, those expenses would not be deductible.
However, in late December 2020, Congress amended the CARES Act to clarify that such deductions (as well as other valuable tax assets like basis increases) would not be disallowed simply because the PPP loan was expected to be forgiven.
On January 6, 2021, the IRS confirmed that forgiven PPP funds provide the best of all (tax) worlds. The new guidance obsoletes the November 2020 guidance, and confirms that deductions and certain other tax benefits from expenditures of PPP funds are generally allowable (if otherwise allowable under normal circumstances).
In sum, a PPP loan that is forgiven:
- Does not have to be paid back.
- Does not increase taxable income of the recipient.
- Can be spent while still obtaining the tax benefits, like deductions, basis increases, and other tax attributes, that would have been available had the funds not come from a forgiven PPP loan.
Meredith S. Campbell
Chair Employment and Labor Group
Co-Chair Corporate Investigations, Governance & Risk Management
Email firstname.lastname@example.org T(301)255-0550