In 2020, the CARES Act created Small Business Administration’s (SBA) Paycheck Protection Program (PPP) , which provides short-term and low-interest loans for eligible small businesses to cover business-related costs such as payroll expenses and certain operating costs. The government forgives these loans if the borrower meets specific criteria.
Requirements for loan forgiveness
Borrowers can apply for forgiveness on the principal and accrued interest of their PPP loans if they remain employed and limit the decrease in wages. Generally, this forgiven debt is subject to income taxation, but Section 1002 of the CARES act specifically excludes forgiven PPP loan amounts.
Claiming tax deductions for PPP loans
The Internal Revenue Service (IRS), upon evaluating how to manage the taxation of the forgiven debt, issued a public notice stating that PPP loan recipients cannot claim a deduction for expenses funded by forgiven PPP loans. However, the government’s executive branch nullified and overruled the IRS’s notice, allowing borrowers to deduct expenses paid out of forgiven PPP loans from their taxes.
Additional IRS guidance on deductions
The IRS states that taxpayers can deduct ordinary or necessary business expenses. Still, a taxpayer cannot deduct expenses allocable to income not subject to taxation. The SBA began accepting applications for PPP loan forgiveness in the third quarter of 2020 and began processing the payments to lenders shortly after that. At the same time, the SBA expanded the list of allowable uses of proceeds and loan forgiveness to include other items not previously included, such as supplier costs, human resources, accounting needs, and other items.
PPP loans helped many Americans keep their small businesses from going underground and forgiving these loans came as an added relief for millions of people, amid a struggling and uncertain economy. Because such issues are complex, you may wish to seek guidance to determine whether you can receive such relief.
