The IRS is Denying Deductions for Business Expenses Covered By PPP Funds, But Congress is Pushing Back With Proposed Legislation

The Payroll Protection Program (PPP) has been a HUGE boon to countless small businesses!

But as been the case with many “disaster relief” funding programs, the qualifying requirements and potential consequences associated with PPP have become a bit of a moving target.

PPP as beneficially as it may be, has been revised, revamp, and reissued several times now. And it’s likely to see further tinkering and future revision before the is COVID crises ultimately passes us by. All of which creates tons of confusion for business owners.

The latest issue impacting businesses participating in PPP is the question of deducting business expenses covered by PPP funds. To make a long story short, the IRS is refusing to accept deductions for business expenses if those expenses were paid with PPP funds. Congress is looking overrule the IRS. But proposed legislation to counter the IRS’s ruling has stalled, leaving the whole situation somewhat up in the air.

Denying this deduction is likely to be a very big deal for many small businesses that use business expense deductions to offset their annual gross income for tax filing purposes. As such, I wanted to delve a bit deeper into the topic and provide a more detailed perspective.

Why Is The IRS Denying Business Expense Deductions Paid With PPP Funds?

PPP was designed to give small businesses, with 500 employees or less, access to as much as $10 million in funds to cover payroll and other operational, loaned at a 1% interest rate. Moreover, if PPP funds are used according to program guidelines, the majority of the accrued debt is eligible to be forgiven. Thereby turning the PPP loan into a government grant.

Of course, the hope for most small businesses taking PPP funds is to have the majority, if not all, of the “loaned” capital “forgiven.”

The IRS sees businesses taking PPP funds that are eventually forgiven to be essentially receiving “free money.” Thus, to then deduct expenses paid with said “free money” is, in effect “double-dipping,” In other words, taking unfair advantage of the relief program.

Does The IRS Have a Point?

Typically, whenever any business loan debt is “forgiven,” it triggers a taxation clause that treats the lent funds as income. This makes sense to an extent, because it’s reasonable to consider a business loan with no repayment requirement to be income.

In addition, including a tax consequence to such actions also minimizes the likelihood this approach will be used for questionable actives, such as money laundering.

But Even If The IRS Has A Point, Is Limiting Such Deductions Good For Business Given The Current Economic Climate?

Most small businesses, and quite a few Republicans in Congress, say no. The prevailing argument is the government should be giving small businesses — the segment of our economy hardest hit by the pandemic fallout — as much financial leeway and economic assistance as possible.

The whole purpose of making PPP loans largely “forgivable” is to ease the financial burden increasingly weighing down small businesses. So, why not also allow business expense deductions even if those expenses are paid with forgiven PPP funds? It’s all in services to propping up small businesses.

What Steps is Congress Taking to Counter The IRS’s Position?

The Small Business Protection Act (s.3612) would reverse the IRS ruling and allow business expense deductions for PPP funded expenditures.

But surprisingly, this legislation is seeing considerable resistance, and is currently stalled in Congress. And while the bill’s sponsors and proponents vow to keep pushing for its passage, the Small Business Protection Act’s ultimate fate remains unclear.

In The Meantime…

Some small businesses plan to claim the PPP funded deductions, regardless of the IRS’s current position. And if necessary, they’ll battle with the Tax Man after the fact.

Have Questions About How PPP Deductions Could Impact Your 2020 Tax Filing?

As has been the case with most facets of COVID-related financial relief, this issue remains very much undecided. As such, it’s tough to say how PPP deductions will impact your 2020 business taxing filing. But we can investigate both potential scenarios to give you an idea of how the situation might play out for your business in either regard. If you’re interested, get in touch with me here…

I’m available to help!