Treasury confirms expenses paid with forgiven PPP funds are not deductible
The U.S. Treasury Department and the Internal Revenue Service (IRS) have issued guidelines clarifying the tax treatment of expenses when a Paycheck Protection Program (PPP) loan has not been canceled by the end of the year in which the loan has been received.
Because companies are not taxed on the product of a canceled PPP loan, expenses paid with loan funds are not deductible. The US Department of the Treasury’s statement on the guidelines suggests, “This does not result in a tax benefit or tax loss since the taxpayer has not paid anything out of pocket.”
“If a business reasonably believes that a PPP loan will be canceled in the future, the expenses related to the loan are not deductible, whether or not the business has filed a cancellation request. Therefore, we encourage businesses to file a pardon request as soon as possible. “
In the case where a PPP loan had to be canceled, and this is not the case, companies will be able to deduct these expenses.
“Today’s guidelines provide taxpayers with more clarity and flexibility,” Secretary Steven Mnuchin said. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to request a loan forgiveness as quickly as possible.”
Construction contractors have taken the largest chunk of all segments of the economy out of the $ 525 billion P3 loans issued by the Small Business Administration. The program was part of the federal government’s coronavirus relief legislation that began in April. This money was loaned under conditions that would allow forgiveness if it were used in specific proportions only for the payroll and certain expenses such as rent and utilities. Expenses which are normally deductible business expenses.
Joseph Natarelli, National Construction Industry Practice Group Leader at Marcum Accounting Firm, says Construction Dive that many of its clients are considering not requesting the PPP exemption in order to avoid a heavy tax bill.
“They say, ‘If I knew then what I know now, then I wouldn’t have taken the loan and I should have fired people,'” he said.