COVID Relief Bill: PPP-Paid Expenses Are Deductible (Updated 12/28/2020)
December 23 2020
This past Monday, December 21, a $900 billion pandemic relief bill came out of the U.S. House and Senate. It is called the Consolidated Appropriations Act, 2021. If President Trump signs it, it will become law. Weighing in at 5,593 pages in length, it addresses many areas, including vaccines, education, childcare, jobless benefits, energy, and national security.
Part of the bill is the COVID-Related Tax Relief Act of 2020 (COVIDTRA). One reason why COVIDTRA is getting attention is that it provides direct payments to individual taxpayers, “recovery rebates” – similar to the direct payments that went out to individuals earlier this year.
Another thing COVIDTRA does is clarify that taxpayers whose Paycheck Protection Program (PPP) loans are forgiven ARE allowed deductions for otherwise deductible expenses that were paid with PPP loan proceeds. See COVIDTRA Section 276(a)(1). This overrides the IRS’s earlier position that businesses could not claim deductions for expenses paid with PPP loan proceeds when the loan is forgiven or expected to be forgiven. COVIDTRA also clarifies the tax basis and other attributes of the PPP borrower’s assets will not be reduced as a result of PPP loan forgiveness.
When a PPP loan is forgiven, the borrower does not need to include the amount of the forgiven PPP loan in taxable income. That is a great benefit for the borrower. Now, under COVIDTRA, the ability for taxpayers to deduct expenses paid with forgiven PPP loan money further amplifies the benefits of the PPP loan.
For example, think about a partnership that gets a $100 PPP loan. The partnership spends the $100 on PPP-specific expenses (payroll, rent, etc.), and then has the PPP loan forgiven. The partnership does not pay any federal income tax on the $100. Also, according to COVIDTRA, the partnership can reduce its taxable income by $100 by deducting the $100 that it spent on the PPP-specific expenses. If the owners of the partnership are all taxed at a rate of 37% on ordinary income passed through from the partnership, $100 of PPP money (received tax free) also saves them $37 in taxes.
If it becomes law, this will be a significant tax benefit for many businesses.
On Tuesday, December 22, President Trump threatened not to sign the bill, pressing for higher direct payments and changes to various provisions. However on Sunday, December 27, he signed the bill as passed by Congress.
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