The IRS has provided guidance on the deductibility of certain expenses incurred in a trade or business and paid for with funds from a loan under the Paycheck Protection Program (PPP). The PPP was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and provides loans (covered loan) to assist small businesses on certain expenses incurred during the economic challenges due to the COVID-19 emergency.
In general, a deduction is allowed for all ordinary and necessary expenses paid or incurred in a trade or business during the taxable year. The IRS clarifies that no deduction is allowed if the payment of eligible expenses results in forgiveness of a covered loan.
Under the Cares Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan in an amount equal to the sum of payments made for the following expenses during the 8-week period beginning on the covered loan’s origination date.
The recipient of the covered loan can use the proceeds to cover the following eligible expenses:
- payroll costs,
- certain healthcare benefits,
- interest on mortgage obligations,
- utilities, and
- interest on any other debt obligations.
Please call our office if you have any questions on covered loans and relief provided by the CARES Act. We can help you determine the amount of nondeductible expenses as a result of a covered loan received under the Payroll Protection Program.