Good news for businesses that received COVID-19-related relief
The IRS and the Treasury Department recently released good news regarding claiming deductions for expenses associated with the Paycheck Protection Program (PPP) loans that have been forgiven. The news also applies to Economic Disaster Loan (EIDL) grants and EIDL advances.
In March of 2020, the Cares Act created the PPP to provide economic relief to small businesses that were negatively impacted from the financial crises caused by COVID-19. However, the legislation did not provide details on the deductibility of expenses paid with forgiven loans.
When the original IRS guidance came out, the ruling did not allow businesses to deduct expenses that had been paid with forgiven PPP loans. Since a significant amount of a business’s expenses would not have been deductible, this would have resulted in taxes increasing substantially.
Fortunately, many organizations were concerned and confronted Congress about the tax effect the original ruling would have on struggling businesses. A significant increase in taxes could be devastating for the survival of many businesses.
On December 4, 2020, the Office of Advocacy (Advocacy) held a meeting to discuss PPP issues, which approximately 150 people attended. Speakers included representatives from the national accounting firm KPMG and the Tax Foundation. Both agreed that the current IRS guidance on the deductibility of expenses paid with forgiven PPP loans would undercut the purpose of the PPP loan.
Advocacy shared the need for a legislative fix to the House and Senate Small Business Committees.
Finally, Congress stepped in and stated that business expenses paid with forgiven PPP loans would be deductible.
The deductibility of business expenses paid with forgiven PPP loans is effective for subsequent PPP loans. Additionally, this ruling includes business expenses paid with Economic Injury Disaster Loan (EIDL) grants and EIDL advances.
The guidance in Revenue Ruling 2021-02 reverses guidance that was issued last year by the IRS. In the previous guidance, Treasury Secretary Steven Mnuchin was opposed to the ability to deduct expenses related to forgiveness of PPP loans. Mnuchin stated that “double-dipping” by receiving aid and deducting the funds would not be allowed.
The new guidance will provide relief to many businesses who were concerned about a large increase in their tax liability due to receiving financial aid.
David Zubler is a tax accountant in East Tennessee, the author of four books, and a philanthropist. All of his proceeds from the books go to a charitable foundation he created for underprivileged children. He is also the founder of Your Tax Care which provides tax education. David can be reached for questions and consultation at yourtaxcare.com.