PPP Expense Deductibility – Update

Effective December 27, 2020, the Consolidated Appropriates Act, 2021 (CAA, 2021) was signed into law. The act contains numerous provisions meant to bolster the economy.  Among these provisions is clarification on the deductibility of PPP expenses.

Background

The CARES Act established the Paycheck Protection Program (PPP) loan and made any forgiven portion of the loan exempt from taxable income.  The IRS issued Revenue Ruling 2020-32 earlier this year establishing its position that expenses paid with forgiven PPP funds would not be tax-deductible, essentially making the forgiven loan taxable.

Congress continued to express the tax-free intent of the PPP. Lawmakers have always maintained the intention was for the loan forgiveness income to be tax-free, as well as the expenses to be deductible.  

What Changed?

 CAA 2021 clarifies taxpayers whose PPP loans are forgiven are allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This update makes forgiven PPP funds truly tax-free.