Can you deduct expenses from a Paycheck Protection Program Loan payment? That’s the big question that many business owners who applied for a PPP loan were wondering until recently. Many business owners turned to the loan program in the hopes of protecting payroll and securing their financial future during the turbulent times of COVID 19.

These business owners have counted on the loan forgiveness afforded by the program that enables them to continue making payments on qualified expenses.

The IRS has issued Notice 2020-32, which has important implications for tax deductions for PPP loan proceeds expenses. Business owners are eligible to get the loan forgiven under the CARES Act if the loan proceeds were used for specific purposes, including:

  • Rent
  • Payroll
  • Utilities
  • Other specified/qualifying expenses

As a result, the CARES Act stated that the forgiveness of the loan is excluded from the applicant’s taxable income during this period. The CARES Act, however, failed to dive into expense tax deductibility and the IRS has answered the question: no tax deduction can be taken for those expenses.

This means that a company who uses their Paycheck Protection Program loan can have the loan forgiven and have those forgiven proceeds classified as tax free, but cannot also “double dip” by deducting the rent expenses that were paid for by the PPP loan. This means that many companies might be taking advantage of the PPP loan in the short term as a financial means for survival, but receiving a lower benefit than if the rent (or other qualifying expenses) were deducted from taxes.

This guidance follows the general rule that tax-free income expenses cannot be deducted. Those business owners who have applied for or received the PPP loan should be prepared to account for these expenses for financial purposes but not for tax benefit purposes.

Do you need help figuring out how your receipt of the PPP loan or other aspects of the CARES Act influences your tax position? Schedule a consultation today to discuss your tax options and determine whether there are any proactive measures you can take to protect your company financially now or in the future.