New 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.
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.
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.