IRS Reverses Position on Paycheck Protection Program Loan Expense Deductibility Hanson Bridgett LLP
- The CARES Act provides that PPP loans can be canceled without the borrower forgetting the debt income, but does not specify whether business expenses can be deducted if they are paid from the proceeds of the PPP loan.
- On April 30, 2020, the IRS released Notice 2020-32 clarifying that taxpayers whose PPP loans were canceled could not deduct business expenses covered by the proceeds of these loans.
- As part of the year-end COVID-19 credit and relief legislation enacted on December 27, 2020, Congress expressly provided that taxpayers can treat expenses paid with the proceeds of PPP loans as business expenses. ordinary and necessary reducing their overall gross income.
- The IRS subsequently issued new guidelines (Rev. Rul. 2021-2), reversing its original position in Opinion 2020-32.
The Coronavirus Aid, Relief and Economic Security Act, Pub. L. n ° 116-136, (the CARES Law) amends several tax provisions of the Internal Revenue Code (the Code). The changes are designed to provide relief to businesses and individuals affected by the economic effects of the COVID-19 crisis.
In particular, article 1106 of the CARES law provides that loans granted under the Paycheque Protection Program (the PPP) can be canceled without the borrower incurring the forgiveness of debt income as long as the loan proceeds have finally been used for payroll, certain mortgage interest and rent obligations, and mortgage expenses. public services. However, the CARES Act did not say whether businesses could deduct expenses paid with the loan proceeds, which are ultimately written off.
On April 30, 2020, the IRS first addressed this issue in Notice 2020-32. In the opinion, the IRS interpreted the principles of Section 265 of the Code (generally prohibiting a deduction for expenses attributable to tax-exempt income) to determine that “no deduction is permitted under [the Code] for an expense otherwise deductible if the payment of the expense gives rise to a delivery of a guaranteed loan. “In our legal alert published on May 1, 2020 (No deductions for you: Notice 2020-32 restricts P3 loan deductions, but prominent lawmakers hesitate), we noted that as a result of this notice, a business that would accept PPP loans would potentially have non-deductible expenses which, in turn, would increase that business’s tax liability.
The IRS position has been heavily criticized by prominent lawmakers such as House Ways and Means Committee Chairman Richard E. Neal (D-Mass.), Rank Member Ron Wyden (D-Ore .), and Senate Finance Committee Chairman Chuck Grassley (R- Iowa). In a letter To the US Secretary of the Treasury, lawmakers wrote that the ban on trade deductions as provided in Notice 2020-32 “nullifies the benefit that Congress specifically granted in exempting the cancellation of PPP loans from income” and renders indeed Article 1106 “meaningless”. Grassley and other lawmakers have further indicated that Congress intends to allow businesses to obtain a business deduction for expenses paid with proceeds from PPP loans.
On December 27, 2020, President Trump enacted the COVID-19 Year-End Credit and Relief Act legislation passed by Congress, which includes the “COVID Tax Relief Act of 2020”. The legislation specifies that business expenses paid with a P3 loan will be considered deductible for federal tax purposes, even if paid with the proceeds of a forgivable loan.
Following the enactment of the COVID-Related Tax Relief Act of 2020, the IRS issued Rev. Rul. 2021-2, which reverses their position in Opinion 2020-32, noting that such findings are “no longer exact statements of law” and are now “declared obsolete”. This change is retroactive and therefore applies to PPP loans already funded under the existing PPP loan program in 2020. Taxpayers can deduct eligible business expenses paid with a PPP loan received in 2020.