From what we know, when lawmakers originally passed the Paycheck Protection Program (PPP), it was supposedly under the provisions that people don’t pay taxes on the forgiveness amount and that they could deduct the expenses that they paid with the PPP money. However, new IRS efforts are trying to destroy tax deductions for PPP paid expenses.
At the end of April, the IRS issued Notice 2020-32. This notice asserts that Paycheck Protection Program loan recipients may not deduct business expenses paid using the PPP money that gave rise to forgiveness. Examples include:
- Defined payroll
- Utilities
- Rent
- Interest
Lawmakers’ Approach
On May 5, 2020, letter to Secretary of the Treasury Steven Mnuchin, Senator Ron Wyden, Senator Chuck Grassley, and Congressman Richard E. Neal jointly stated that the IRS got this wrong as the intent of the CARES Act was for the PPP to be a tax-free grant.
No Action Taken
Even with the lawmaker’s letter, the IRS was unmoved. Their position remained with no deduction for the expenses paid with the PPP money. The IRS did understand that the lawmakers did not intend for this to happen; however, from their point of view, the way the lawmakers enacted the law was the issue. For this problem to be fixed, all we can do is have the lawmakers pass a new law, but they haven’t taken any action to do so.
Revenue Rulings and Procedures
On November 18 of 2020, the IRS made things worse regarding deductions for PPP monies that were forgiven and spent on utilities, rent, payroll, or interest. In Revenue Ruling 2020-27, the IRS ruled that people cannot deduct expenses paid with PPP money if they received forgiveness of those loan monies. Also, in Revenue Procedure 2020-51, the IRS prepared safe-harbor procedures that must be followed if people’s PPP forgiveness is subsequently denied, or for those that decide not to apply for forgiveness. With these rulings, the IRS has made it clear to lawmakers that if they don’t like the non-deductibility of expenses paid with PPP monies, they should change the law.
The Effect on You
You continue to come out ahead if you cannot deduct the expenses you paid with PPP money. You don’t pay money on income, so you can’t deduct the expenses. For example, if Norman’s C Corp gets a $100k PPP loan that is forgiven, it becomes not taxable. With this money, the corporation covers $100k of its payroll, which is not deductible, costing the corporation $21k in taxes. Norman’s corporation is ahead by $79k.
Potential Problem for Your Section 199A Deduction
According to what is known at the moment, if people’s section 199A deduction depends on the payroll, their inability to deduct payroll costs paid with PPP money will cost them some of their Section 199A deduction.
What Can We Do?
All we could do is join the thousands of tax professionals and business taxpayers in urging lawmakers to fix the non-deductibility problem.
When it comes to tax reductions, it’s important that we get together for change. We hope this blog informed you on the happenings with the new IRS efforts taking place with tax deductions for PPP paid expenses. MFI Works, Inc is here to help, so please don’t hesitate to contact us! To schedule a free initial business strategy session, click here.
