UPDATE December 28, 2020 – President Trump apparently changed his mind because he approved H.R. 133. (Big sigh of relief!)
UPDATE – Congress has passed H.R. 133. President Trump says he won’t approve it. Unless he changes his mind, Congress probably won’t revisit COVID-19 relief until 2021. At least we know Congress INTENDS to allow deductions paid using proceeds from a forgiven PPP loan.
The Coronavirus Relief Package (H.R. 133) that will be passed by Congress this week includes some welcome relief for businesses that received Paycheck Protection Program (PPP) loans.
Earlier this year, the IRS announced in Notice 2020-32 that tax deductions wouldn’t be allowed for business expenses paid using PPP loan proceeds when the debt is forgiven by the federal government. The IRS’s justification was the expenses were paid with “tax exempt” income.
Since taxpayers were in the same position with their taxable income as if the debt forgiveness was taxable, this was a “backdoor” way of making the debt forgiveness taxable, while Congress stated in the CARES Act the forgiveness should be tax-free.
Small businesses and their tax advisors appealed to Congress to fix this error, and Congress listened.
Section 278 of Subtitle B, COVID-related Tax Relief Act of 2020, clarifies that otherwise deductible expenses paid with proceeds of a PPP loan that is forgiven remain tax deductible.