Dear Client:

The Internal Revenue Service recently provided additional clarification on its stance that expenses paid with Paycheck Protection Program (PPP) Loan proceeds would be non-deductible come tax time. This was never the intention of Congress when the program was established, as the loan was intended to be a fully forgivable, tax-free grant to businesses and business owners so long as certain parameters were met. However, the IRS has taken its stand and it has valid legal grounds to do so.

Although this conclusion is consistent with the IRS’ stance throughout the year, we did get additional clarification on the timing of the non-deductible expenses that we had been waiting to hear about. If you received a PPP loan and spent the loan proceeds on otherwise deductible expenses that are eligible for forgiveness and if, at the end of the taxable year, you reasonably expect to receive forgiveness for the PPP loan, even if you have not yet applied for forgiveness, then those expenses are non-deductible in the year those expenses were paid or incurred. For example, expenses paid or incurred in 2020 that you anticipate will be forgiven when you apply for forgiveness, even if you don’t apply for forgiveness until next year, are considered non-deductible on your 2020 tax return.

Despite all of this, the American Institute of CPAs and numerous business lobbyists are pushing Congress to act immediately to override this conclusion. It remains unclear if the AICPA and others will be successful in their venture to maintain the original Congressional intent of the law, though we will continue to monitor this situation for additional developments and to provide updates as they come available. Just yesterday morning, a bipartisan group of senators presented a $908 billion stimulus plan and it includes modifications regarding deductibility, but the details have not been released yet. For the time being, we wanted to send out this reminder that the expenses paid out of PPP loan proceeds remain non-deductible when paid or incurred.

Given the potentially significant impact this ruling may have on your business’s 2020 profitability, we strongly encourage you to consider discussing year-end tax planning strategies with us to ensure that all avenues are considered and that adequate taxes are paid in, as the loss of these expenses can greatly increase your taxable income in 2020. Please reach out to us at your earliest convenience to discuss this further.