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New IRS restrictions on PPP loans

Small businesses that received PPP loans and used those funds to incur otherwise deductible qualifying expenses can not deduct expenses if they reasonably expect receive the PPP loan remission, even if they have not yet received or requested the remission.

The CARES law

The CARES Act (Public Law 116-136) established the Paycheck Protection Program (PPP) to help small businesses affected by the Covid-19 pandemic. Small businesses that have received PPP loans can forgo the full loan amount up to the eligible expenses incurred.

The CARES Act lists eligible expenses as: (1) salary costs, (2) interest on a covered mortgage bond, (3) any covered rent obligation payment, and (4) any covered utility payment. These expenses are also deductible business expenses.

Decision on revenues 2020-27 clarifies the deductibility of eligible expenses paid using PPP funds.

Year-end tax implications

The US Department of the Treasury previously issued an advisory that companies cannot deduct qualifying expenses if PPP funds used for those qualifying expenses are waived. Many taxpayers have interpreted this guideline to mean that the surrender must take place for the non-deductibility rule to apply, which for many businesses would not be until 2021, and therefore should allow deductions in 2020.

The IRS guidelines from last week go further and explicitly state that taxpayers cannot deduct otherwise deductible qualifying expenses if they “reasonably expect” to receive a PPP loan forgiveness, even if the borrower has not yet submitted a rebate request by the end of the tax year. .

Many businesses that have received PPP loans and used those funds for qualifying expenses would have to deduct those expenses in the 2020 tax year. For example, a taxpayer might deduct as business expenses qualifying expenses paid with PPP funds. in 2020 and expect to include as gross income the amount canceled as debt relief in 2021. This would return to zero after tax year 2021 and still allow small businesses struggling with the pandemic to benefit from ” favorable tax treatment in 2020.

Now Reverend Rul. 2020-27 creates a situation where businesses that needed PPP loans to help fund their qualifying expenses will have higher taxable income for 2020. As a result, this decision creates immediate concerns for businesses that are in the process of, or have already completed a majority of their year-end tax planning.

Possible changes to Congress

Senior members of Congress agree that the IRS’s interpretation creates an unfair burden on troubled businesses and may seek legislative changes. The Senate introduced the bipartisan Small Business Expenditure Protection Act of 2020 for the proposed changes. The House may submit similar legislation to change the new rule to the IRS.

The congressional relief would help millions of taxpayers now faced with choosing a heavier tax burden or canceling their P3 loans. However, Congress is unlikely to have enough time to enact legislation affecting the 2020 tax year, unless the legislation is retroactive.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Bruce Hendrick and David Heidenreich are partners at Carrington Coleman in Dallas, and Kylie Jennings is a partner.
Bruce Hendrick 214.855.3033 [email protected]
David Heidenreich 214.855.3031 [email protected]
Kylie Jennings 214.855.3080 [email protected]