The Small Business

Paycheck Protection Program (PPP)

Tax Deductibility

Update on Tax Deductibility for PPP Borrowers

On January 6, 2021, the IRS and the Treasury Department released new guidance on whether businesses could claim tax deductions for expenses paid with a forgiven PPP loan. Their guidance came in response to a provision in the latest COVID relief bill enacted at the end of 2020.

Forgiven Business Expenses Are Deductible

As part of the recent legislation, the Tax Relief Act of 2020 included language meant to clear up confusion surrounding the tax deductibility of business expenses paid with forgiven PPP funds.

When the PPP was implemented last March through the Coronavirus Aid, Relief and Economic Security Act (CARES Act), that law excluded PPP loan forgiveness amounts from businesses’ gross income. However, it did not make it clear that covered business expenses, which would ordinarily be tax deductible, would remain so in cases of loan forgiveness.

While the IRS stated last year that business expenses (such as payroll) that received loan forgiveness under the program would not be tax deductible, the latest COVID relief legislation states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided.”

In summary:

  • Business expenses paid with forgiven PPP loans are still tax deductible.
  • This applies to all participants in the PPP, even if a loan forgiveness application has already been submitted.
  • As before, loan forgiveness amounts are excluded from a business’s gross taxable income.

Be sure to consult with your CPA for more information and specific guidance related to your business.

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Important Disclaimer: Bank of the Sierra wants to support our business customers by providing information and reminders about the Paycheck Protection Program (PPP), which are based on guidance from the Small Business Administration (SBA). Please note that the information we provide is for informational purposes only. We are not guaranteeing its accuracy. We are not endorsing the program nor providing business, legal, or tax advice. There are still uncertainties about the program, and the SBA is expected to release additional guidance. Current information can be found on the SBA’s Paycheck Protection Program webpage.