The current COVID-19 pandemic has caused massive ripple effects throughout the global economy. In the US alone, the novel coronavirus has led to many business closures with small businesses being the most impacted. Thankfully, the federal government passed the Payroll Protection Program (PPP) as part of the CARES Act. The program provided funds to small businesses to cover payroll expenses, rent, utilities, and debt obligations. The good news regarding the program, in addition to receiving a loan to help cover these expenses, is the funds used in the first 8 weeks from the loan origination date can be forgiven if the rules regarding the Loan Forgiveness Program are followed.
However, what was not clear was if the IRS would treat the funds as taxable or tax-exempt. The Treasury Department, along with a careful reading of the CARES Act, provided such clarity by declaring the funds forgiven under the PPP Loan Forgiveness Program would be tax-exempt.
The PPP tax-exempt funds is good news for those fearing they would have to report such information due and for those hesitant on applying for the PPP loan for that reason.
Although, what has not been discussed is the treatment of expenses paid using the PPP loan and the subsequent Loan Forgiveness Program. The thought process among recipients of the PPP loan was the expenses would still be deductible. Yet, such thinking has been proven to be incorrect. According to the Internal Revenue Code 265 (25 USC 265), expenses paid with tax-exempt funds are not deductible and no exception to this statute was entertained by the CARES Act. Therefore, all expenses paid with funds that are ultimately forgiven under the PPP loan will not be deductible. Of course, if any business forgoes the Loan Forgiveness Program and seeks to pay back the loan or any portion of PPP is not included in the Loan Forgiveness Program, the expenses in those scenarios will likely be deductible on your business tax returns.