Can Businesses Deduct Expenses Paid with Paycheck Protection Program (PPP) Loans?

While the Paycheck Protection Program (PPP) provided a crucial financial lifeline for many businesses, many businesses that obtained loans under the PPP were not prepared for the compliance obligations that securing a forgivable loan from the federal government entailed. Among numerous other issues, many companies are currently struggling to appropriately address the federal income tax implications of paying their expenses with PPP loan funds. If you are unclear as to what your company can and can’t deduct, you should consult with an experienced Washington D.C. business tax attorney promptly.

Are Business Expenses Paid with PPP Loan Funds Deductible for Federal Income Tax Purposes?

Whether a company may deduct business expenses paid with PPP loan funds depends on whether the company has had its loan forgiven. A key aspect of the PPP – and one of the main reasons why the program was flooded with applications they day it opened – is that loans issued under the program are forgivable in their entirety provided that certain conditions are met. The principal conditions for loan forgiveness under the PPP are:

• The business that received the loan was eligible under the U.S. Small Business Administration’s (SBA) guidelines;
• The loan was necessary due to the, “uncertainty of current economic conditions,” related to the COVID-19 pandemic; and,
• The business used its PPP loan funds solely for approved business expenses, which include payroll expenses, health insurance premiums, mortgage or rent payments, interest payments under pre-existing obligations, and utilities.

If a company has its PPP loan forgiven, then business expenses paid with funds received under the program are not deductible for federal income tax purposes. As the Internal Revenue Service (IRS) explains in Notice 2020-32, which it issued on April 30:

“[N]o deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.”

The CARES Act is the federal statute that established the Paycheck Protection Program. In addition to deriving justification for the denial of deductions under the CARES Act, the IRS also relies on federal case law establishing that the Internal Revenue Code, “den[ies] deductions for otherwise deductible payments for which the taxpayer receives reimbursement.”

For companies seeking forgiveness of their PPP loans, it is important to understand the federal income tax and other legal implications involved. Business owners, executives and in-house counsel who have questions are encouraged to contact Thorn Law Group for more information.

Speak with Washington D.C. Business Tax Attorney Kevin E. Thorn at Thorn Law Group

Our firm represents companies of all sizes with regard to federal income tax compliance and in all IRS matters. If you have questions or concerns and would like to speak with Kevin E. Thorn, Managing Partner at Thorn Law Group, call 202-349-4033, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.