Since April, we have been waiting on a resolution between the conflict between Congress’ intent for the PPP loan forgiveness to be non-taxable and the IRS’ position that the expenses attributable to the forgiven PPP loan are not deductible.
IRC Sec. 265(a)(1) disallows a deduction for otherwise eligible expenses to the extent the payment of those eligible expenses is allocable to tax-exempt income in the form of reasonably expected covered loan forgiveness. The IRS says that “the fact that the tax-exempt income may not have been accrued or received by the end of the taxable year does not change this result because the disallowance applies whether or not any amount of tax-exempt income in the form of covered loan forgiveness and to which the eligible expenses are allocable is received or accrued.
On December 27, 2020 President Trump signed the new Budget Act passed by Congress on December 21, 2020 now allows for the deduction of the expenses paid that are attributable to any PPP loan forgiven. This will apply to PPP loans from the original PPP loans this past summer, as well as the new round of PPP loans authorized in the new ACT.
Among other provisions, the new act also opens up another round of PPP loans that can be fully forgiven and directs the SBA to design a new 1 page form for PPP loan forgiveness when the loan amount is under $150,000.