The controversy over the deductibility of salary costs by beneficiaries of Paycheck Protection Program (PPP) loans was finally settled, less than a week before the end of the year.
Deductibility is expressly provided for in the Consolidated Appropriations Act, 2021. This over 5,500-page legislation was passed by the House and Senate on Monday, December 21. President Donald Trump signed the bill on Sunday, December 27, 2020, with this declaration:
“I am signing this bill to restore unemployment benefits, stop evictions, provide rental assistance, add money for PPP, get our airline workers back to work, add a lot more money for vaccine distribution, and much more.
Deductions not previously processed
A key provision of the new legislation is helping PPP loan recipients resolve the thorny question of whether salary (and other) expenses can be deducted if paid with the proceeds of the PPP loan.
Accountants, lawyers and beneficiaries have been trying to tackle this problem since the passage of the CARES (Coronavirus Aid, Relief, and Economic Security) law that created PPPs in March. However, controversy ensued, as the CARES Act did not address the deductibility of expenses.
The IRS Perspective
The IRS, through Notice 2020-32 which was issued at the end of April, the deductions were do not authorized for salary costs covered by PPP loans. (The canceled loan would, however, be excluded from gross income.)
In one interview in May, Treasury Secretary Steven Mnuchin said that “[t]Money entering the PPP is not taxable. So if the money that comes in is not taxable, you cannot double the deduction. “
In November, the IRS confirmed its position in Rev. Rul. 2020-27. That is, the IRS said that a taxpayer could not deduct qualifying expenses in their 2020 tax year if, at the end of the tax year, the taxpayer had a “reasonable expectation of repayment” in the form of loan forgiveness based on expenses paid or incurred during the period covered.
Meanwhile, accountants and lawyers have argued for deductibility.
This was all settled with the adoption of the new law.
Congress shines a light on deductibility
Article 276 of the new legislation makes it clear that Congress disagreed with the IRS’s non-deductibility position.
It reads: Section 276, “Clarification of the Tax Treatment of the Surrender of Secured Loans”
“(A) (i) TAX TREATMENT – For the purposes of the Internal Revenue Code 1986 –
“(A) (i) (1) no amount shall be included in the gross income of the eligible beneficiary by reason of the debt forgiveness described in paragraph (b),
“(a) (i) (2) no deduction shall be denied, no tax attribute shall be reduced, and no base increase shall be denied, due to the exclusion of gross income provided in subsection (1).”
What does this language mean?
Certainty is restored. Businesses can deduct salaries and other business expenses as usual, even if these expenses are paid with PPP loans. This raises a huge burden for P3 recipients who were concerned about the IRS’s position on deductibility.
Under the newly enacted law, recipients of PPP loans are not treated any differently from recipients of non-PPP loans when it comes to receiving tax deductions for business expenses. That goes for 2020 and future tax returns, whether a PPP loan recipient’s loan is canceled this year, next year, or never. That is, the PPP loan has no impact on the deductibility of business expenses.
For additional resources, read Marcum’s “COVID-19 relief bill enacted with tax provisions. “
If your business has received a PPP loan, send me the questions you would like to address. Write to me at [email protected]