One of the most widely publicized provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020 was the addition of a loan program administered by the SBA entitled the Small Business Paycheck Protection Program (PPP). The funds were provided in the form of a loan that can be fully forgiven when the proceeds were used for payroll and certain other business expenses. These loan proceeds when forgiven, were not to be taxable.
As the year went on, the Internal Revenue Service stated that expenses paid with PPP loan proceeds were not to be deductible. They cited IRC section 265(a)(1) which states, in effect that otherwise deductible business expenses could not be deducted when paid for using tax-exempt income. They affirmed their position in notice 2020-32 and Revenue Ruling 2020-27 issued in early December by stating specifically that this stance applies to forgiven PPP loans.
The Consolidated Appropriations Act, 2021 passed by congress on December 21, clarified that expenses paid for with funds from forgiven PPP loans are allowed as deductions and that the tax basis and other attributes of the borrowers’ assets will not be reduced as a result of this forgiveness. This treatment will continue for Second Draw PPP loans as well.