Have you considered taking a deduction on your expenses paid with PPP funds?
While it might be tempting, the IRS considers this double-dipping. Standard business deductions are not allowed by the IRS if payment of those expenses also results in PPP loan forgiveness.
Under the CARES Act, PPP loans for small businesses can be totally forgiven provided the funds are primarily used to retain employees, among meeting other requirements. However, CARES Act guidelines also state loan forgiveness is not tax-deductible. The forgiveness of your loan will result in a “class of exempt income” under 1.265(b)(1) of the Regulations.
According to Treasury Secretary Steven Mnuchin, “The money coming in the PPP is not taxable. So, if the money that is coming is not taxable, you cannot double-dip. You cannot say that you’re going to get deductions for workers that you did not pay for.”
Mnuchin stated that he had personally reviewed the IRS guidance and if the loan forgiveness had been deemed taxable, business deductions would be allowed. “This is basically tax 101,” said Mnuchin.
Many lawmakers have expressed a desire to re-address these guidelines in future legislation since the intent of the PPP loan program was to help small businesses maximize their ability to maintain fluidity, retain employees, and recover from this crisis as best possible. It is quite likely that IRS guidelines on tax exemption may be specifically addressed in any new coronavirus-related legislation to clarify the original intent of the PPP loan program under the CARES Act.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.