Deductions available for certain expenses paid with the proceeds of the PPP loan | Dickinson wright

In March 2020, the CARES Act established the Paycheck Protection Program, which granted loans (“PPP loans”) to businesses meeting certain requirements. Subject to certain limitations, beneficiaries of PPP loans have the right to obtain cancellation of all or part of the PPP loan if the loan proceeds have been used for certain “covered purposes” (either within eight weeks or twenty-four weeks after the creation date of the PPP loan). These covered purposes include salary costs, rent, and utilities – expenses that might otherwise be deductible from income. Since the PPP loan is canceled, a taxpayer is not required to include the canceled amount in his gross income.

The CARES Act did not clarify whether otherwise deductible expenses made using the proceeds of a canceled PPP loan could still be deducted – that is, whether recipients of PPP loans could both exclude from the income the canceled PPP loan amount and deduct the amounts paid as covered expenses. In IRS Notice 2020-32, the IRS stated that no deductions would be allowed for such expenses.

Congress specifically addressed the treatment of these expenses in the Consolidated Appropriations Act, promulgated on December 27, 2020 (“2021 Appropriations Act”). The Appropriation Act of 2021, contrary to the position taken by the IRS in Notice 2020-32, clarified by law that recipients of PPP loans are allowed to take any deductions that would otherwise be eligible for expenses. paid with the proceeds of a canceled PPP loan. This provision provides taxpayers with a potential dual benefit – the potential exclusion of income from a PPP loan, as well as an income tax deduction for expenses paid with the proceeds of that PPP loan.

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