The United States Internal Revenue Service (IRS) has released several items containing guidance related to Paycheck Protection Program (PPP) loans—specifically for businesses planning to seek forgiveness for the loans.
In short, the IRS says that since businesses will not be taxed on the proceeds of a forgiven PPP loan, if a business reasonably believes the loan will be forgiven in the future or the business qualifies for forgiveness, costs related to the loan can not be used as a tax deduction for federal taxes. If the business expects the loan to be forgiven, and the loan is not, in fact, forgiven, the business will be able to deduct the costs from its taxes.
“[The] guidance provides taxpayers with greater clarity and flexibility,” said Secretary Steven T. Mnuchin. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”
U.S. contractors received more than $12 billion in PPP loans in 2020, ranging in amount from less that $50,000 to more than $5 million.
The IRS also recently published an FAQ covering how to claim deductions if such a PPP loan is subsequently forgiven. Both pieces of guidance cannot be used as legal authority, but they provide insight into the organization's current position on the taxation of PPP loans.
In general, PPP loans are considered forgivable if businesses devote at least 60% of the proceeds to payroll expenses and 40% to expenses like rent and utilities. Businesses can also receive partial forgiveness for loans in some cases.
The guidance specifically mentions tax deductions related to employee retention tax credits in merger and acquisition transactions. Here's a good primer on what to know in this specific use case.
The Air Conditioning Contractors of America, the American Road & Transportation Builders Association, and more than 100 more organizations joined together recently calling on Congress to quickly clear and concise regulations for PPP loan forgiveness.
“Bipartisan and bicameral legislation introduced earlier this Congress and would reduce compliance costs by streamlining the forgiveness process for mom-and-pop businesses who received PPP loans during these unprecedented times,” the letter reads. “Additionally, passing such legislation that would expand the hold harmless protections for lenders will provide financial institutions that originated and currently service PPP loans the opportunity to focus their time and energy on providing much-needed credit and financial services to individuals and businesses by creating regulatory certainty for PPP loans in the future.”