On December 27, President Trump signed the $900 billion COVID-19 relief bill into law, passed by Congress on December 21. The legislation, called The Consolidated Appropriations Act, 2021, reopens the Paycheck Protection Program with some important changes and ensures that expenses paid for with forgiven PPP loan funds will be tax-deductible.
Since the introduction of the Paycheck Protection Program, we’ve been grappling with the question of whether otherwise deductible expenses paid for with PPP loan funds that result in forgiveness are tax-deductible.
In November, the IRS issued guidance in the form of a revenue ruling (Rev. Rul. 2020-27), which addressed PPP borrowers who pay expenses in 2020 and will not receive loan forgiveness until 2021. Revenue Ruling 2020-27 concluded that no eligible expenses that result in loan forgiveness are tax-deductible and provided a safe harbor (Rev. proc. 2020-51) for borrowers who have their PPP loan forgiveness denied or later chose not to request forgiveness.
COVID-19 related Tax Relief Act of 2020 (COVIDTRA), another subsection of the New Act, clarifies that taxpayers whose PPP loans are forgiven are also allowed deductions for otherwise deductible expenses paid with the proceeds of a PPP loan. It asserts the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness, and no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness. This provision is effective as of the date of enactment of the CARES Act, 3/27/2020.
The provision provides similar treatment for PPP2 loans, effective for tax years ending after the date of enactment of the provision.
As a result of PPP1 or PPP2 loan forgiveness, no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied.
In the case of an eligible recipient that is a partnership or S Corporation, any amount excluded from income is treated as tax-exempt income for purposes of Sections 705 and 1366 (basis provisions for partnerships and S Corporations, respectively). Any increase in the adjusted basis of a partner’s interest in a partnership under Section 705 shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.
The new legislation also repeals the requirement that PPP borrowers deduct the amount of any Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount.
Contact Us for More Information
If you need assistance filling out your PPP loan forgiveness application form, would like us to review your application, or have any other questions or concerns, we’re here to help. Please email [email protected] or call 443-320-4101.
Author: Megan O’Donnell