Treasury Denies PPP Deductibility

November 25, 2020

Earlier this year, the Internal Revenue Service (IRS) ruled that otherwise-tax-deductible expenses that are paid with a forgiven Paycheck Protection Program (PPP) loan will not be deductible. This ruling is in direct conflict with the statute, which clearly said PPP loans would not be taxable.

NSBA and our trade association colleagues have been working with allies in the House and Senate to pass legislation that would reaffirm statutory intent and reverse the IRS ruling, as well as having communicated with the U.S. Small Business Administration (SBA) and the Department of Treasury urging that the IRS ruling be rescinded.

It appears highly unlikely that Treasury Secretary Steve Mnuchin will change his positioning, so NSBA is focusing its efforts on Congress where Sen. John Cornyn (R-Texas) has introduced legislation (S. 3612) which would reverse the IRS ruling. The chairmen of the Senate Finance and House Ways and Means committees view this IRS ruling as defying congressional intent, as do many in leadership.

Further underscoring Sec. Mnuchin’s position, on Nov. 19, Treasury and the IRS released guidance clarifying the tax treatment of expenses where a PPP loan has not been forgiven by the end of the year the loan was received. According to the guidance, since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. IRS believes this results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.

The guidance states that if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses. 

According to Sec. Mnuchin, the guidance is intended to provide taxpayers with greater clarity and flexibility while ensuring that all small businesses receiving PPP loans are treated fairly.

Click here to view the revenue ruling.
Click here to view the revenue procedure.

Please contact your lawmakers TODAY and express your concerns that by disallowing normal business deductions, the IRS is, in effect, taxing forgiven PPP dollars and underhandedly reducing the actual amount of aid extended to small businesses.

Urge Lawmakers to Support PPP Deductibility!