How to deduct you PPP expenses under the CARES Act?

Right now, the IRS says you can’t deduct the expenses related to your PPP loan forgiveness but it doesn’t have to be that way. Write to your Congressperson and Senators and tell them to allow PPP Expense deductions for small businesses. See the sample letter at the end of this post from the AICPA.

There is a lot going on right now for tax professionals as we wrap up 2020. One big item we’re dealing with is the deductibility of expenses related to the PPP loans that were issued under the CARES Act. As you might remember, the Paycheck Protection Program authorized loans to be issued by bank and backed by the Small Business Administration.

The PPP loans were designed to be forgivable if the borrower met certain conditions and used the fund for specific purposes. One of the primary purposes of the loans was to make sure small businesses had the financial resources to fund their payroll and keep their employees employed. The CARES Act specifically states that the forgiveness of the PPP loans should not be taxable to the taxpayer.

The IRS has come out with a position that essentially makes the loans taxable, but they do it by disallowing deductions. The IRS believes that the expenses are related to the non-taxable forgiveness and therefore should not be deducted. They issued a couple pieces of information about this last week and you can read about them in my prior blog post here.

The tax community still believes these expenses should be deducible based on the language in the CARES Act. and is now encouraging tax professionals and taxpayers to contact their representatives in Congress and Senate to pass one of two bills that would make these expenses deductible. The bills are:

• Senate Bill 3612 – Small Business Expense Protection Act of 2020 sponsored by Senator Cornyn from Texas and has 35 cosponsors.
• House Bill 6821 – Small Business Expense Protection Act of 2020 sponsored by Rep. Holding of North Carolina and has 50 cosponsors.

The American Institute of Certified Public Accountants (AICPA) has strongly come out in favor of allowing businesses to deduct the expenses related to the PPP loan forgiveness. You can read their press release from November 23, 2020 “AICPA & its Members Urge Congress to Support PPP Expense Deductibility” for more information about this issue.

In addition, the AICPA urges its members and small businesses to write to their Congressional representatives about this matter and has developed a template of a letter that you can use to write to your representative and senators. Here is the draft letter:

To save time, you can copy and paste the draft email below. Find your U.S. senators’ and representatives’ contact information at Congress.gov.

I am writing you today to strongly encourage you to include in any year-end, must-pass legislation language that will allow millions of small business owners a tax deduction for expenses paid with Paycheck Protection Program (PPP) forgiven loans. Bills have been introduced in the Senate (S.3612 sponsored by Senator Cornyn (R-TX)) and in the House (H.R. 6821 sponsored by Representative Holding (R-NC) or H.R. 6754 sponsored by Representative Fletcher (D-TX)) that would ensure that PPP loan recipients are provided the full benefits intended in the CARES Act.  All Americans have been impacted by the COVID-19 pandemic, and your actions in Congress have provided much-needed assistance to millions of struggling businesses. It is important that you ensure that these same businesses are not also subject to additional and unexpected taxes as they continue to struggle to survive. Borrowers who are eligible for forgiveness of their PPP loans have spent the funds as the program directed. Unless they are allowed to deduct these expenses, they may be forced to spend additional funds to pay taxes on the loan proceeds – funds they may not have. Passing this legislation as quickly as possible will provide small business owners more certainty as they focus on year-end business planning that is especially important in these challenging economic times. I ask that you contact your Senate and House leaders to ensure that PPP loan forgiveness deductibility language is passed by Congress before the end of the year.