Recent guidances from the IRS confirm that business spending with PPP loan money isn’t tax deductible, even if you don’t apply for forgiveness in the current calendar year. But that could change, particularly if a new stimulus bill is enacted.
It feels like years, not months, ago that the coronavirus arrived and changed life as we know it.
The IRS just issued a new guidance clarifying how to treat business expenses if you received a Paycheck Protection Program (PPP) loan for your business to cover payroll and the loan is forgiven.
The PPP is a part of the CARES Act, the stimulus package Congress passed in March. It offered forgivable loans to businesses to cover payroll and certain business expenses, such as rent, utilities and mortgage interest. The deadline to apply was Aug. 8.
Banks, who served as a pipeline for the funds, have now been sending out notices to borrowers encouraging them to apply for forgiveness. That has prompted concerns among some borrowers.
IRS guidance spells out deduction rules
Under the recent IRS Notice 2022-32, any covered expenses that get forgiven are not deductible in the year where you incurred or paid them. If, for instance, you spent $15,000 of PPP funds on payroll in 2020, you cannot deduct that $15,000 on your business taxes in 2020.
That’s true even if you are not planning to apply for forgiveness until 2021. Under IRS Rev. Ruling 2020-27, you can’t deduct expenses you “reasonably expect” to be forgiven, even if you don’t submit your forgiveness application in the current calendar year.
It is possible that this will change. If Congress passes another stimulus package, which is still on the table, it is possible that there may be another take on the deductibility issue. Both Republicans and Democrats in Congress are trying to overturn this guidance. But for now, it’s clear that the expenses are not considered deductible.
See related: Does your small business qualify for an R&D tax credit?
What to do if you were counting on a deduction
Keep scrupulous records of your business spending for now so you can take a deduction if the program rules change – and stay in touch with your accountant. Many accountants and business groups are still advising clients to wait to submit their PPP forgiveness applications with the hope the U.S. Small Business Administration and Department of Treasury will issue further guidance.
However, bear in mind that you must submit your application for forgiveness within 10 months of your 24-week covered period. PPP funds had to be spent within 24 weeks of receiving the loan.
Also keep a close eye on news of a stimulus. President-elect Biden has encouraged Congress to come together on a new package. Whether a new law passes could depend on the outcome of the Georgia runoff election for Congress.
If the runoff results in Democratic control of Congress, a stimulus is more likely. If a new stimulus does pass, with both the Senate and House in favor of renewing aid to small businesses, there will likely be more help on its way and perhaps more discussion on the deductibility issue.
See related: CARES Act tax deduction for charitable giving
It’s not easy to stay on top of the federal government’s frequent updates on the PPP, but this is a case where a little effort can go a long way. Any spending that is forgiven is tax-free, so many businesses will come out ahead from using PPP funds, as long as they submit their forgiveness application on time.