Tax Alert: New Law Clarifies Tax Treatment of PPP Loan Forgiveness

On Dec. 27, 2020, President Trump signed into law the Consolidated Appropriations Act, which was passed with overwhelming majorities in both Houses of Congress on December 21.

The new law has many tax or tax-related provisions that will impact businesses and individuals. This brief tax alert will concentrate on clarifying the tax treatment of Paycheck Protection Program (PPP) loans.  In our next tax alert, we will concentrate on changes to the original PPP list of allowable and forgivable expenses, including a simplified forgiveness application process for loans that qualify and details regarding eligibility and revised program terms included in the recently introduced PPP second draw loans.  We will also explain the extension and expansion of the Employee Retention Tax Credit.

Changes to the deductibility of expenses paid with PPP

Under Sec. 276, “Clarification of Tax Treatment of Forgiveness of Covered loans,” all expenses paid with PPP funds are fully deductible. This tax deductibility is intended to apply to PPP loans applied for and forgiven prior to or after the enactment of this Act.

The previous provisions left ambiguity in the way of deductibility and actually excluded the ability to deduct expense paid with PPP loans that were forgiven. The new section 276 provisions specifically state that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided…” This change clarifies the intentions of Congress to allow the deductions as previously discussed. Please note additional guidance in regard to PPP should arrive within 15 days. However, this makes it clear that expenses paid with PPP funds are deductible.

The effects of the Consolidated Appropriations Act will be wide-ranging. Stay tuned for our continued series of tax alerts on the substantive provisions of the new law. If you have any questions, don’t hesitate to reach out to your Topel Forman adviser, call us at (312) 642-0006, or contact us.

© 2020