The Paycheck Protection Program (PPP) was a central part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in March of this year. It provided loans to help keep businesses afloat, which could be entirely forgiven, so long as they met certain payroll and employee retention guidelines. While 60% of any PPP loan had to be used on payroll to be forgivable, the remainder could be used for business expenses like rent or mortgage, utilities, and so on. But can you deduct these business expenses if you took a PPP loan? Keep reading to learn more.
IRS Rules on Deductions Remains Problematic
Unfortunately, the IRS’s current rule regarding business deductions is no—you cannot deduct business expenses that were paid for using PPP funds if you hope to have that loan forgiven. This has proven to be a point of issue for most lenders and business advocacy groups, who argue that creating an additional tax burden on business owners in this way defeats the original purpose of the PPP loans. The IRS, however, argues that receiving a tax deduction for expenses paid for with tax-free income is “double dipping.”
But perhaps more importantly, this rule has created an issue for businesses still seeking loan forgiveness. Until that forgiveness is received, the PPP funds are a loan, and are therefore taxable income. This means that, with tax season fast approaching, businesses awaiting a decision on their loan forgiveness application are faced with a sticky dilemma: Take the deductions now and amend their returns if/when they receive full or partial loan forgiveness? Or don’t take the business deductions and receive a refund if/when their PPP loan is forgiven?
While a legislative fix to this situation has been in the works for some time, it has been stalled out in the Senate, with no certainty as to when or if it would be passed into law. And until then, the IRS’s current tax code remains in effect.
Taking the Deduction Now or Later
The dilemma described above doesn’t have a set answer that will fit every business. The most conservative approach would be to not take the deductions and assume full forgiveness from your lender. This would help you to avoid any fees for unpaid taxes that may arise if you take deductions, then subsequently receive loan forgiveness and owe money to the IRS.
However, if you need to hold onto more cash, or you’re uncertain that you’ll receive forgiveness of your PPP loan, you can take the deductions now. This isn’t a decision you should make alone. Be sure to consult with your business tax accountant in Provo to determine the best route for your business, and the pros and cons of each of these options.
Deducting Additional Expenses
It is important to note that receiving a PPP loan does not mean that you can’t take any business deductions this year. The limitation on business deductions is limited only to purchases paid for with PPP proceeds. If you can demonstrate that a business expense was paid for with taxable income, then you should still be able to deduct it from your tax return.
For this reason (as well as for the purpose of loan forgiveness, of course), it is incredibly important that you document how your PPP funds are spent in great detail. It is advisable to use all PPP funds on payroll if you can, as this is much easier to document and allows you to deduct any other business expenses you may have throughout the year.
If you’re concerned about how your PPP loan impacts your ability to deduct business expenses, contact The Accounting Guys to speak to a business tax accountant in Provo. We’ll help you to determine the best course of action for your business. Give us a call to schedule a consultation.