5/11/20 CK Bulletin: From IRS: Companies who receive PPP loans will not qualify for tax deductions

For those of you who have applied for the PPP Loan, there is some news that may negatively affect the benefits that you receive. We believe that there is a decent chance that Congress will change this ruling, but as it currently stands:

The IRS released guidance stating that expenses related to forgivable loans through the Paycheck Protection Program (PPP) won’t be tax-deductible.

Under the PPP, a small business loan program created as part of the third, $2.2 trillion coronavirus relief bill, small businesses wouldn’t have to repay the low-interest loan they received as long as the loan went to essential expenses such as maintaining payroll.

Usually, wages are deductible expenses and forgiven debt counts as taxable income.

But under the coronavirus relief law, the PPP loan forgiveness is not counted as taxable income. The IRS said in its guidance that expenses that result in forgiveness of a PPP loan are not tax deductible in order to prevent a “double tax benefit.”

The agency cited Section 256 of the tax code, which states that deductions can’t be taken if they are tied to a certain class of tax-exempt income.

If desired, Congress could override the IRS’s stance by passing a law that explicitly allows the deductions.

It has done so previously for religious leaders and military service members, allowing them to deduct property taxes and mortgage interest even if they’re receiving tax-free housing allowances.

There is also a possible court challenge by PPP loan grant recipients. We have seen the courts overrule IRS decisions on deducting snowplowing and landscaping for home offices. Unfortunately, it usually takes years prior to being adjudicated.

We will keep you updated if there are any significant changes to this ruling, and as always we are here to assist you when the need arises.

~With care and concern,
from all of us at Colman Knight


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