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Rules on Deducting Expenses Under PPP Clarified
Under the CARES Act's Paycheck Protection Program (PPP), businesses who received a PPP loan could use part of the funds to pay for eligible expenses, including utilities, rent and mortgage interest. The Internal Revenue Service (IRS) had previously issued guidance that expenses paid from PPP proceeds that were forgiven would not be deductible. But the question remained as to the timing of the disallowance if forgiveness had not been approved as of the end of the year. 
Now we have the answer: no deduction for expenses paid by PPP funds is allowed on the 2020 tax return, even if the PPP loan has not been forgiven by the end of 2020 (but can reasonably expect to be forgiven in the future).
The IRS and U.S. Treasury Department has determined that, since businesses are not taxed on the proceeds of a forgiven PPP loan, the taxpayer has not paid anything out of pocket, and expenses paid by PPP funds cannot be deducted.
The IRS provided two hypothetical examples. In the first example, a business had obtained a PPP loan and used it to pay for eligible expenses, then applied for loan forgiveness. But the lender had not yet responded and the loan had not been forgiven by the end of 2020. In the second example, a PPP borrower had used the funds to pay eligible expenses but had not applied for loan forgiveness before the end of 2020. In both examples, the taxpayers are not permitted to claim deductions for the eligible expenses on their 2020 income tax returns.
If a PPP loan is expected to be forgiven but eventually is not forgiven, the expenses paid with PPP funds can then be deducted.
While the ruling clears up some of the confusion regarding deductibility of expenses paid by a PPP loan, the tax treatment of PPP loans is still complicated. For assistance, please contact Gray, Gray & Gray's Tax Department at (781) 407-0300.
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