A simple concept is nearly always true in tax law: You can dip once, but not twice. With the new â€œConsolidated Appropriations Act of 2021â€ passed last week by the U.S. House of Representatives, however, that truism just got turned on its head. This latest legislation package (a $900 billion comprehensive budget and economic stimulus bill linked to the PPP, or Paycheck Protection Program) contains a welcome surprise for business owners affected by the COVID-19 pandemic. In a significant about-face from guidance originally published by the IRS, the new legislation allows a business to deduct expenses in full, even if paid with PPP funds[i]. The more-than-5,500-page bill was signed by President Trump on Sunday evening, December 27.
The U.S. Treasury released guidance on multiple occasions this year expanding and affirming the position that taxpayers could not deduct eligible business expenses during the 2020 tax year if they were paid with a PPP loan that is forgiven (or expected to be forgiven). See Rev. Rul. 2020-27. In keeping with the concept of no double-dipping, it seemed reasonable or even practical that the forgiven PPP loans would not count as taxable income; and thus, the expenses paid with those funds were not deductible. Nonetheless, accounting industry groups fought back against this interpretation, seeking a consistent treatment for all legitimate business expenses as deductible from taxable income. With the new stimulus bill, Congress has corrected the language which significantly affects prior positions, and ultimately the outcome.
The new law clearly intends to allow full deductibility for expenses paid by the business, even if those expenses are paid with funds obtained through a forgiven PPP loan.
Most tax planning for 2020 has been conducted under the assumption that expenses paid with PPP loan proceeds that were expected to be forgiven would not be deductible. Accordingly, many business owners will now have an opportunity to revisit the amount of tax they have paid in, as this change may equate to a significant decrease in taxable income for their businesses. Taxpayers may be able to file quick claims for refunds beginning in 2020 to refund any overpayment of taxes paid.
REDW will stay in front of the forthcoming legislation; stay tuned for updates regarding major changes contained within the bill. Please contact REDW Senior Tax Manager Ryan Hart with questions on the stimulus bill or tax planning opportunities.
[i] The Consolidated Appropriations Act, 2021, States in Section 276(a)(i)(2) regarding Paycheck Protection Program Loans (Page 2004 of the document)â€œno deduction shall be denied or reduced, no attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by [PPP loans being forgiven]â€.
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