Can You Deduct Expenses If You Took a PPP Loan?
For many businesses financially impacted by the COVID-19 pandemic and subsequent shutdowns, the government-funded PPP loans distributed earlier this year were an enormous relief. By meeting certain payroll and employee-retention requirements, businesses could stay afloat despite the severe downturn in the US economy and ultimately receive full forgiveness for the funds received (so long as requirements were met). But these loans have presented a difficult dilemma for many business owners: the inability to deduct business expenses on their upcoming tax returns. Here’s what you need to know about deducting expenses if you took a PPP loan this year.
What Does the Current Tax Code Say?
Based on language in the IRS tax code and subsequent notices distributed by the IRS, businesses cannot deduct any business expenses that were paid for using PPP funds. This is to prevent what they view to be “double dipping” in terms of reducing taxable income using expenses paid for with income that was already untaxed.
Response to This Stand
When the IRS provided this clarification after PPP loans had been introduced as part of the CARES Act, it was met with widespread disagreement. Many argued that creating an additional tax burden on businesses that were supposed to be supported by this forgivable loan was contrary to the original purpose of the CARES Act.
Many lenders and business advocacy groups, as well as certain politicians, have spoken out against the inability to deduct expenses paid for with PPP income, and a legislative fix has been proposed. However, it’s stalled out in the Senate and it’s unclear if or when it will be pushed forward.
The Borrower’s Dilemma
If you took a PPP loan and have not yet received forgiveness for it, you likely find yourself with an uncomfortable dilemma. Because lenders have 60 days (and the SBA has 90 days) to review forgiveness applications, you may not know if your PPP loan has been forgiven in whole or in part until the first or second quarter of 2021—and with the likely backlogs to come, it may be even longer.
So, should you take your business deductions now, regardless of whether or not you used PPP funds for them, and amend your return if/when your loan is forgiven? Or should you not deduct any expenses paid for with your PPP loan and receive a refund later if you receive PPP loan forgiveness? And what of any possible penalties and interest you may be asked to pay if you choose incorrectly?
Unfortunately, one choice is not necessarily better than the other in every circumstance. The right choice for your business will depend on your company’s current situation and financial circumstances, so it’s important to consult with one of our CPAs before making this decision.
The most conservative approach would be to assume full forgiveness of your loan and not deduct any expenses which were paid for with PPP funds. This would help you avoid potential interest and fees should you take deductions, then have that loan forgiven. However, if your company needs to hold onto more cash right now, or if there’s any uncertainty about receiving forgiveness for your loan, you could take the deductions now. But, again, this is not a decision you should make alone; consult with a tax expert.
Deducting Other Expenses
Please be aware that taking a PPP loan does not mean you’re unable to take any business deductions at all this year. You simply cannot deduct expenses that were paid for using PPP funds. So, if you can show through documentation that your business deductions were paid for using taxable income, rather than your PPP loan, you can include it as a business expense on your tax return.
The simplest way to do this is to use all of your PPP funds for payroll purposes if you can. Payroll expenses are very easy to document and can easily show where all of your PPP funds were used. Then, any additional business expenses would be considered deductible. However, if you’re unable to do this, the most important thing is that you provide clear documentation of how your PPP funds were spent, so you can deduct any additional expenses on your return.
If you’re concerned or confused about how your PPP loan impact your business tax return, you’re not alone. This is a difficult situation, but we're here to help you through it. Contact us today and speak to a business tax professional to get assistance with deciding how to deduct business expenses this year.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174