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Regulation and Compliance > Federal Regulation > IRS

IRS Reversal: Expenses Paid With PPP Loan Funds Are Now Tax-Deductible

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The IRS sign on the IRS building (Credit: Allison Bell/ALM)

The Internal Revenue Service and Treasury Department issued new guidance Wednesday ending the prohibition on “double dipping” when it comes to expenses paid with funds from Paycheck Protection Program loans.

The new guidance allows “tax deductions for the payments of eligible expenses when such payments would result (or be expected to result) in the forgiveness of a loan under the Paycheck Protection Program.”

Previous guidance said that business expenses like rent, mortgage, utilities and salaries — deductible under normal circumstances — could not be deducted if paid for with PPP funds. But that guidance is now obsolete, says IRA expert Ed Slott of Ed Slott & Co.

“The message is that’s what Congress intended all along,” he told ThinkAdvisor on Thursday in a phone interview.

The change aligns IRS policy with the coronavirus relief law enacted in December, Jeff Levine, Buckingham Wealth Partners director of advanced planning and director of advisor education, told ThinkAdvisor in a Friday email message.

“Important to remember that many businesses only kept staff on payroll because they had those funds,” he said, so taxing those business owners on that money “could have put them in a pretty tough situation.

He added that business owners “will be able to increase their basis to correspond with the forgiven amount, which can help prevent double taxation down the road.”

Treasury and IRS explained in their notice that the COVID-related Tax Relief Act of 2020 amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) “to say that no deduction is denied, no tax attribute is reduced, and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan.”

This change applies for taxable years ending after March 27, 2020.

Revenue Ruling 2021-02 obsoletes Notice 2020-32 and Revenue Ruling 2020-27.

Accordingly, the IRS and Treasury state, the prior guidance is declared obsolete as of December 27, 2020, the effective date of the Tax Relief Act.

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