IRS OK’s Deductions for PPP-Funded Expenses

January 7, 2021

By Jessica D. Manivasager and Emily M. Chad

Memo sign PPP Loan Paycheck Protection Program on the black piece of paper.Congress, after initially waffling on legislation to clarify deductibility of expenses funded with Paycheck Protection Program (PPP) loans, explicitly authorized the deduction of these expenses in the consolidated appropriations bill passed at the end of 2020. In response, the IRS has officially reversed its prior guidance and will allow a federal income tax deduction for expenses paid with a forgiven PPP loan.

The CARES Act was silent on the question of whether expenses paid with PPP loan proceeds were deductible. Last May, the IRS released Revenue Notice 2020-32, which stated business expenses paid with PPP loans will not also generate federal income tax deductions. A bipartisan group of U.S. senators introduced legislation in May to allow such deductions, but Congress did not enact that policy into law until December with the passage of the latest pandemic relief bill included in the most recent appropriations act. Taxpayers can take these deductions for both PPP loans received under the original PPP program created in the CARES Act and PPP loans received under the renewed PPP program created in the appropriations act.

On January 6, the IRS released Revenue Ruling 2021-2, which reverses both Notice 2020-32 and a December Revenue Ruling, to reflect current law. The previous IRS guidance prevented “double dipping” and confirmed a long-held position in tax policy that; if a taxpayer receives tax-free income (here, the forgivable PPP loan proceeds), that such taxpayer cannot also deduct expenses (here, the expenses covered by the PPP loan proceeds) incurred in generating that income. As expected back from the legislation proposed in May, this allowance of “double dipping” applies only to relief programs under the CARES Act and does not serve as a general repeal of the double dipping prohibition.

Stay tuned for further developments. Contact your Fredrikson lawyer for guidance on navigating pandemic financial and tax relief packages.

Fredrikson & Byron’s COVID-19 Resource Center