May 13, 2020

Can You Deduct Expenses Paid With Forgiven PPP Loans?

Since the Paycheck Protection Program (PPP) first launched, thousands of small businesses have rushed to apply in hopes of receiving government funding to sustain their companies through the pandemic. Due to the limited funding and rapid response during the first and second wave of PPP loans, some legislatures have recently called for a third round of funding.

There is still a lot of uncertainty around PPP loans. From the application and funding process to repayment and loan-conversion, small business owners are working to better understand the details of the Paycheck Protection Program. 

One common question that forward-thinking small business owners are asking about PPP loans pertains to taxes: can you deduct business expenses that were paid with the help of PPP loans? The IRS says no. Keep reading to understand why and what you can and cannot do.

Business Expenses Cannot Be Deducted

The PPP was meant to cover expenses during a time when businesses were shut down. It encouraged companies to pay employees while covering costs like rent and utilities to prevent bills from piling up. 

These costs are normally deductible expenses; however, the IRS views the deductions of expenses paid with a PPP loan as “double-dipping.” The small business uses money from the government grant to cover an expense and then claims a deduction in taxes because the expense existed. 

Notice 2020-32 published by the IRS says, “no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).” 

This stipulation means that you cannot claim expenses that are normally deductible if they are paid by the PPP loan or other CARES Act funding. 

Congress May Reverse Its Stance

While the IRS is holding firm on its notice about tax deductions, a few tax experts believe the laws may change. 

Robert Wood, who contributes to Forbes, explains that the CARES Act was so hastily written that Congress didn’t have time to consider deductions and other expenses accrued by businesses. The IRS then stepped in with its view of the situation and developed Notice 2020-32. 

“This is clearly a relief provision for businesses in trouble, and surely Congress would have said no deduction if it meant that, correct?” Wood asks. 

There could be a debate in the House and Senate halls regarding whether small businesses can deduct these expenses to get the relief they need. 

However, if this rule does hold, make sure you (or your tax team) account for the exact expenses that you accrued and paid for with the PPP loan. This precaution will help you easily sort deductible expenses in 2020 from those that you can’t claim because of the loan program.

Most small business owners are still figuring out how to receive and use their PPP loan, and many lawsuits have already been filed against the PPP. There’s a lot of confusion and questions around the program and how it will impact businesses moving forward. While expenses paid with PPP loans are not currently tax-deductible, that could certainly change. 

 

While every effort is made to ensure the accuracy of information when a story is published, the coronavirus pandemic and Paycheck Protection Program (PPP) have caused details to change at a rapid pace. Additional guidance from the government may change or clarify certain aspects of the forgiveness process and could result in changes to the information contained in these pages. For the most up-to-date information, please visit the COVID-19 section of our website. For more information, you can call us at (855) 853-6346. Lendio is not responsible for and provides no warranty as to the accuracy of this content. Lendio does not provide legal, accounting or tax advice. The information and services Lendio provides should not be deemed a substitute for the advice of such professionals who can better address your specific concern and situation.

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.

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