Tax Implications of PPP Loans

Some small businesses may be hit with a surprise tax bill related to Paycheck Protection Program (PPP) loans unless Congress acts soon. If you have been following our emails and webinars, you will not be surprised, but you may, nevertheless, be subject to tax consequences that perhaps were not anticipated by Congress when it passed the PPP loan program.

The CARES Act specifically included provisions that forgiveness of a PPP loan would not be taxable. The legislation had no specific statements as to the deductibility of expenditures funded with PPP loan proceeds. In April, the IRS looked to other existing tax law and precedents and released guidance that indicated expenditures funded with PPP loan proceeds would not be deductible to the extent of any forgiveness. Congress subsequently indicated that its intent was that these expenditures would be deductible. Legislation was introduced to establish this result, but that legislation has never passed. Lacking a legislative solution, the IRS guidance on non-deductibility will govern.

The AICPA has already expressed its opposition and engaged with Congress and the Treasury to work to ensure that PPP expenses are deductible.

If this is an issue that will affect your business, you may wish to tell your members of Congress to support small businesses by quickly passing S. 3612 and H.R. 6821, the Small Business Expense Protection Acts of 2020, or H.R.6754, the Protecting the Paycheck Protection Program Act.

This legislation will ensure that the receipt and forgiveness of coronavirus assistance through the PPP does not result in an unexpected and burdensome tax cost for organizations that complied with the terms of the PPP. Passing this legislation as soon as possible will provide small businesses with more certainty as they focus on year-end business planning that is especially important in these challenging economic times.

You may use the drafted letter below or similar language to encourage your member of Congress to move quickly to ensure the passage of these important bills for small businesses.  To find your Congress member, click here.

Sample letter

I am writing you today to strongly encourage you to include in any year-end, must-pass legislation language that will allow millions of small business owners a tax deduction for expenses paid with Paycheck Protection Program (PPP) forgiven loans.

Bills have been introduced in the Senate (S.3612 sponsored by Senator Cornyn (R-TX)) and in the House (H.R. 6821 sponsored by Representative Holding (R-NC) or H.R. 6754 sponsored by Representative Fletcher (D-TX)) that would ensure that PPP loan recipients are provided the full benefits intended in the CARES Act.

All Americans have been impacted by the COVID-19 pandemic, and your actions in Congress have provided much-needed assistance to millions of struggling businesses.

It is important that you ensure that these same businesses are not also subject to additional and unexpected taxes as they continue to struggle to survive.

Borrowers who are eligible for forgiveness of their PPP loans have spent the funds as the program directed. Unless they are allowed to deduct these expenses, they may be forced to spend additional funds to pay taxes on the loan proceeds – funds they may not have. Passing this legislation as quickly as possible will provide small business owners with more certainty as they focus on year-end business planning that is especially important in these challenging economic times.