IRS Rule Allows Deductions For Expenses Previously Disallowed Under The PPP Loan Program

The IRS is providing businesses that received a first round Paycheck Protection Program (PPP) loan a way to deduct expenses they could not claim last year.

Last week, the IRS issued a revenue procedure that provides a safe harbor for certain taxpayers who received a Paycheck Protection Program (PPP) loan between March 26, 2020 and December 27, 2020.

The safe harbor applies to taxpayers who were previously unable to deduct otherwise deductible expenses during the covered period due to an IRS ruling that disallowed costs paid from funds forgiven under the PPP program and treated PPP funds as gross income.

This meant that not only were normally deductible costs for payroll, interest on mortgage obligations, rent and utilities not allowed, but the forgiven portion of the PPP loan would be taxed as income as well.

However, the Consolidated Appropriations Act enacted on December 27, 2020 overturned the IRS ruling and allowed businesses to claim the deductions and treat forgiven PPP loans as taxable income.

EMA supported the provisions of the Consolidated Appropriations Act that fixed the deductibility and taxable income problems. Under the safe harbor established in the IRS ruling, taxpayers may now deduct the previously disallowed expenses in the immediately subsequent taxable year.

More information will be coming from EMA.

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