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IRS Confirms: No Deduction for Expenses Paid with Forgiven PPP Loans

Posted by Concannon Miller on Wed, Dec 2, 2020

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IRS Confirms: No Deduction for Expenses Paid with Forgiven PPP LoansNew federal guidance confirms bad news for businesses with PPP loans: You can’t deduct expenses paid with proceeds from a loan if it’s fully forgiven.

The IRS also warns you can’t deduct businesses expenses if you believe your loan will be forgiven. So for businesses considering waiting until 2021 to apply for forgiveness with the hope of deducting your 2020 business expenses, that’s also off the table if you expect your loan to ultimately be forgiven.

Our Recommendation

For those who believe their loans will be forgiven, we advise to proceed with your forgiveness applications. A fully forgiven loan is more valuable than deducting business expenses.

There’s also the decent chance Congress will change the rules, as members on both sides of the aisle have expressed support for deductions. If Congress hasn’t acted by the tax filing deadlines in March-April 2021, Concannon Miller will likely recommend that clients extend their 2020 tax filings in the hope that the proposed legislation will pass before the extended due date.

Unforgiven Loan Options

The new IRS rules do provide options for PPP loans that aren’t fully forgiven: Those businesses are allowed deductible expenditures attributable to the non-forgiven portion. Filers can take the write-offs on their 2020 or 2021 tax returns, provided the requirements are satisfied.

READ MORE: PPP Loans: The Latest on What Qualifies and What’s Taxable

Remaining Unknowns

While the new guidance reaffirms the IRS position on the non-deductibility of expenses for PPP participants, it does not address other matters that could have significant tax implications, including:

  • The qualified business income (QBI) deduction,
  • The research and development (R&D) tax credit, and
  • The business interest expense limitation.

We continue to monitor the changing rules with PPP loans and will keep you updated on any new rules related to these tax benefits.

Next Steps for Businesses

With business expense deductibility off the table if your PPP loan is forgiven, we strongly recommend working with your CPA on your other options to reduce your 2020 tax liability. Contact us for personalized assistance.

Topics: COVID-19

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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