Understanding Deductible Expenses After PPP Loan Forgiveness

If you received a forgiven loan as part of the Paycheck Protection Program (PPP), it’s important to understand how this may affect your 2020 taxes, particularly your deductions. The IRS recently released Revenue Ruling (Rev. Rul.) 2021-02 which obsoletes Notice 2020-32 and Revenue Ruling 2020-27, and our small business CPAs are outlining what this rule means for your business.

A Closer Look at PPP Loans

As part of the Coronavirus Aid, Relief, and Economic Security Act of 2020, commonly called the CARES Act, the Small Business Administration offered two benefits to small businesses:

1. Paycheck Protection Program loans designed to help employers meet payroll and cover qualifying operating expenses which could then be forgiven if the employer met certain conditions.
2. Employee Retention Tax Credit (ERTC) which is a refundable payroll tax credit for 50 percent of qualified wages employers paid their employees during the COVID-19 crisis. As outlined in the CARES Act, if an employer receives a PPP loan, they can’t claim the ERTC.

Let’s look at the eligible expenses that would allow your loan to be forgiven:

• Payroll costs
• Not reducing wages by more than 25 percent compared to 2019
• Mortgage interest or rent
• Utilities

IRS Revenue Ruling 2021-02

Up until December 27, 2020, the IRS was not allowing the expenses covered by your loan to be deducted, which caused much controversy, particularly with members of congress. However, with the Consolidated Appropriations Act, 2021, businesses can now claim normal tax deductions for expenses paid with PPP money. The latest ruling states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income [provided by the loan forgiveness provision that says forgiven PPP loans will not count as income].” – Consolidated Appropriations Act, 2021.

This change applies for taxable years ending after March 27, 2020.

However, it is important to note that while these expenses are deductible on a federal level, many states are not allowing deductions for expenses that were paid for with PPP loans. For example, in North Carolina, the amount of a forgiven PPP loan is excluded from NC taxable income, but any expenses paid using the PPP loan that are deducted for federal tax purposes are not deductible when calculating NC taxable income.

Schedule a Consultation with Our Small Business CPAs in Raleigh

We understand that 2020 has been challenging, and this extends to your taxes, but we can help. Our experienced CPAs have in-depth knowledge of the tax code and will work with you to reduce your tax costs this year. To learn more, reach out to us today at  (919) 872-0866 or fill out the form below to get started.