Handling PPP Deductions for Tax Purposes

November 30, 2020

PPP deductions are already causing a bit of confusion. Find out the most important information to date, per IRS guidelines.

Image with the words "Paycheck Protection program + 2020 Taxes"

Many businesses benefited from the saving grace from the funds the Paycheck Protection Program (PPP) provided this year.  So, as we approach the end of the year and impending tax season, it’s important to know how the IRS will look at businesses that took out this PPP disaster loan.  Before you embark on your year-end wrap-up, here is a quick look at what you need to know about PPP deductions. 

How does the use of PPP funds for covered expenses affect 2020 taxes?

According to the IRS’s position, deductibility depends on the timing of the covered expenses.

  • The covered period for the PPP loan depends on when the loan was disbursed.
  • If the PPP loan was disbursed before June 5, 2020, the covered period was 6-8 weeks thereafter.
  • If the loan was disbursed after June 5, 2020, the covered period was 6 weeks thereafter.
  • There should be no situation where the covered period for the PPP extends beyond December 31, 2020.
  • If the borrow “reasonably” anticipates loan forgiveness at the end of the tax year, then expenses covered by the loan that fell within the covered period will not be tax deductible in the current year.

What happens to business income taxes due to the use of PPP funds?

The IRS says:

  • Borrowers may not deduct covered expenses, paid with PPP funds, on income taxes. 
  • The amount of forgiven PPP funds used for covered expenses during the covered period will increase the borrower’s taxable income. 
  • If any portion of the PPP loan was not used to pay for covered expenses, then the remaining expenses may still be deductible.
  • If the PPP loan was not or is not expected to be forgiven, then the expenses will go through the normal process of assessment for deductibility.
Related:  Exempt Yourself from Questions: Clarifying “Tax Exempt”

PPP Deductions in a Nutshell

Essentially, expenses paid by the PPP loan are not deductible.  So, this applies whether or not PPP borrowers have submitted an application for forgiveness, and if they “reasonably” expect the loan to be forgiven.

As always, you can expect changes to legislation and more clarification from the IRS as tax season draws nearer.  In the meantime, click here for further details on PPP deductions.

Image including the words "To be continued..." regarding the PPP deductions.

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