May 12, 2020

Can You Deduct Expenses Paid with Forgiven PPP Loans?

For thousands of US business owners, the PPP loans provided by the CARES pandemic stimulus package have served as much-needed financial support during this trying time. The Paycheck Protection Program (PPP) helps cover some of the costliest expenses for small business owners, including payroll, rent, and utilities. 

During mass stay-at-home orders and economic uncertainty, this aid has been a lifeline for small businesses throughout the country.

More details are starting to come out regarding the use of these PPP funds—specifically about whether the expenses covered with the funds are tax-deductible. For now, the IRS says they are not deductible. We dive into the topic of PPP loans and taxes below to help you plan your 2020 business taxes better.

Understanding the IRS Stance on Deductions

The PPP is used to cover expenses that would otherwise be considered deductible. However, the IRS currently sees deducting expenses paid with CARES Act funding as double-dipping. 

Essentially, you would be using federal funds to cover current costs and then deducting those same expenses from your earnings to incur a smaller tax obligation. The IRS feels that small business owners can’t have it both ways.  

As the team at Aldrich CPAs explains, “Since the income generated from the forgiveness of the loans through the Paycheck Protection Program (PPP) won’t be taxable, the related expenses will not be deductible.”

This condition specifically applies to PPP loans that are forgiven as grants, rather than paid back to the IRS in loan form. If you want to learn more about what the IRS says or read its statement for yourself, you can read Notice 2020-32 online. It covers what the PPP can be used for and why expenses cannot be used as deductions. 

What Can You Do?

If you are a small business owner who recently received a PPP loan, the most important step you can do right now is to carefully document what expenses you cover with the PPP loan. 

Per the CARES Act, the PPP loan can turn into an interest-free grant if you spend the money on payroll without furloughing or cutting the hours of your employees. Many companies need to show their expense sheets to have their loans forgiven.

Documenting your expenses will also help you come tax season. You can look at costs that are normally deductible (like payroll) and subtract the amount that was covered by the PPP. This organization will streamline your tax filing and ensure its accuracy.

Keep an Eye Out for More Updates

Business owners can also continue monitoring the IRS’s stance on deductions. A few members of Congress want to push back against the tax restriction, so we could see changes to the policy in the future.

They believe that the purpose of federal aid is to help small business owners as much as possible. If offering deductions can further help companies recover from the pandemic, then it is up to the federal government to balance the budget so it happens. This rule could very well change before it comes time to file your business taxes next year.

Everyone is still working to better understand the PPP and how it can be used. Stay up to date on the latest guidelines to make sure your loan is forgiven without violating any of the set restrictions by Congress or the IRS. While changes are still happening to the Paycheck Protection Program, expenses paid with a PPP loan are not currently tax-deductible.

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.

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