Can businesses deduct costs subsidized by the loan?
The PPP provides forgiveness of the loan to the extent spent on Eligible Expenses and provides that forgiveness amounts are not taxable to the borrower for federal income tax purposes (but not necessarily for state and local income tax purposes).
To be eligible for PPP loan forgiveness and have the cancelled debt excluded from gross income for federal income tax purposes, the loan proceeds must be used for certain specified purposes. The amount eligible for forgiveness is the sum of the following costs incurred and payments made during the covered period and present guidance indicates that no more than 25% of non-payroll related eligible expenses paid from PPP Loan proceeds would be eligible for forgiveness:
- Payroll costs;
- Any payment of interest on any covered mortgage obligation on real or personal property that is a liability of the borrower incurred before February 15, 2020, in the ordinary course of a trade or business (it does not include any prepayment of principal);
- Any payment on any covered rent obligation in force before February 15, 2020; and
- Any covered utility payment for the distribution of electricity, gas, water, transportation, telephone, or internet access for service which began before February 15, 2020.
The statute is not clear as to whether the borrower may also deduct these costs for Federal income tax purposes. Generally, Section 265 of the Internal Revenue Code would preclude a deduction of the expenses due to the tax-exempt nature of the income, but clarity and future guidance is needed.
IRS is expected to issue guidance
The CARES Act simply states:
For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.
So, at present, these questions remain unanswered. However, the Act authorizes the IRS to “issue guidance and regulations implementing this section.” Expect additional future guidance from the IRS on tax issues related to PPP loan debt forgiveness.
If you have any questions, please contact the Kerkering Barberio team at 941-365-4617 or visit or website at https://www.kbgrp.com/resources/covid-19-updates to see the latest resources and updates for businesses and individuals regarding the coronavirus.