New Tax Regulation Replace: Deductibility of PPP-Funded Expenditures

After initial hesitation, President Trump signed H.R. 133 into law yesterday evening, which contains appropriations bills and provides approximately $900 billion in COVID-19 relief. One tax provision of note permits the deductibility of expenses funded by forgiven PPP loans, reversing the IRS interpretation of the March 27 CARES Act.

The CARES Act established the Paycheck Protection Program (PPP), pursuant to which certain PPP loans were eligible for forgiveness to the extent such loans were used for eligible compensation and other payroll costs, mortgage interest, rent, and utilities costs incurred and/or paid during a prescribed period and certain documentation requirements were met. The CARES Act explicitly provided that taxpayers would not recognize cancellation of indebtedness income for federal income tax purposes upon the forgiveness of a PPP loan. However, the CARES Act did not address the deductibility of expenses covered by PPP loans, in what may have been an oversight due to rushed drafting. Since passage of the CARES Act, several senior members of Congress have indicated that their intent was that expenses covered by PPP loans should be deductible, regardless of whether those PPP loans are forgiven. However, the IRS has taken an opposing view. In IRS Notice 2020-32, issued in April, the IRS stated that otherwise tax-deductible expenses incurred by businesses with proceeds of PPP loans were not deductible for tax purposes to the extent the forgiveness of such loans was excluded from taxable income. (See the May 4 Alert here regarding the IRS’s position.)

Overriding the IRS Notice, Congress provides in H.R. 133 that the deductibility of business expenses shall not be denied as a result of the forgiveness of a PPP loan being excluded from taxable income.

In addition, H.R. 133 revives the PPP loan program, including permitting certain eligible businesses to borrow for a second time. H.R. 133 also expands the forgivable expenses enumerated above to additionally include certain of the following: supplier costs, expenditures for workplace modifications related to Covid safety, business software and cloud computing services, and property damage costs due to public disturbances during 2020 not covered by insurance.