IRS OK Deductions for PPP Funded Expenses

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Congress, after initially hesitating on legislation to clarify the deductibility of expenses funded by Paycheck Protection Program (PPP) loans, explicitly allowed the deduction of these expenses in the adopted Consolidated Appropriation Bill. in late 2020. In response, the IRS officially canceled its advance advice and will allow a federal income tax deduction for expenses paid with a canceled P3 loan.

The CARES Act was silent on whether expenses paid with the proceeds of the PPP loan were deductible. Last May, the IRS released Income Notice 2020-32, which stated that business expenses paid with P3 loans would not also generate federal tax deductions. A bipartisan group of U.S. senators introduced legislation in May to allow such deductions, but Congress did not enact the policy until December with the passage of the last pandemic relief bill included in the law. most recent credit. Taxpayers can benefit from these deductions both for PPP loans received under the initial PPP program created in the CARES Act and for PPP loans received under the renewed PPP program created in the Appropriations Act.

On January 6, the IRS issued Revenue Ruling 2021-2, which rescinds both Notice 2020-32 and a December Revenue Ruling, to reflect current law. Previous IRS guidelines prevented “double deductions” and confirmed a long-held position in tax policy that; if a taxpayer receives non-taxable income (here, the proceeds of the conditional repayment PPP loan), that taxpayer cannot also deduct the expenses (here, the expenses covered by the proceeds of the PPP loan) incurred to generate that income. As provided for in the legislation proposed in May, this “double deduction” allowance applies only to relief programs under the CARES Act and does not serve as a general repeal of the double deduction ban.

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