PPP loans and tax deductions

By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs

Tax planning and tax compliance are going to be more important than ever for any business owner continuing to weather the COVID-19 storm. Those that received a PPP loan may need to step extra lightly.

The PPP loan program presented an attractive option to business owners at a volatile time, allowing them access the needed funds to cover everything from payroll costs to mortgage interest. Hundreds of billions of dollars were loaned out. However, we learned early in the loan process that the use of these funds may cancel out other benefits afforded to the business owner.

As it stands now, loan recipients will not be able to deduct the expenses if they used PPP loan dollars, that will be forgiven, to cover those expenses. Under Section 1106(b) of the CARES Act, a recipient of a covered loan can receive forgiveness of debt on the loan in the amount equal to the sum of payments made for expenses during an 8-week period beginning on the covered loan’s origination date. Those expenses include:

  • Payroll costs
  • Payment of interest on any covered mortgage obligation
  • Payment on any covered rent obligation
  • Covered utility payments.

*It is important to note that Section 1106(b) excludes from gross income any amount forgiven under PPP.

While the relief in these areas served as a savior for many businesses, the inability to deduct any of these expenses presents serious tax concerns. In short, they could be facing down higher tax bills, unless Congress steps in.

As you can imagine, business owners and professional organizations were shocked by this. Many have been challenging the non-deductibility of these PPP expenses, including the American Institute of Certified Public Accountants (AICPA). Their position is based on the fact that The CARES Act itself does not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven as a result of the payment of those expenses.

The AICPA has said they feel as though the IRS’s interpretation denying deductions of expenses forgiven under the PPP program does not align with Congress’s intent. They believe the intent of the CARES Act was to allow businesses to deduct all of their ordinary and necessary expenses — including any expenses used in determining PPP covered costs.

For now, we wait to see if members of Congress take any action against the matter of these deductions. If you have any questions about your PPP loan or your finances in general as we continue to navigate this global pandemic, please reach out. I am always here to help.

 

Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com.

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2 comments

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