On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020. The Consolidated Appropriations Act includes the COVID-related Tax Relief Act of 2020, which makes business expenses paid with forgiven PPP loans deductible.
When in March 2020, the CARES Act was signed into law, and the Paycheck Protection Program (PPP) was created to provide economic relief to small businesses. The CARES Act provided for forgiveness of PPP loans and stated that such forgiven PPP loans were not taxable income. Later, the IRS published a notice that otherwise deductible business expenses paid with forgiven PPP loans would not be deductible. Indeed, in November 2020 the IRS reaffirmed its position that otherwise deductible business expenses paid with a forgiven PPP loan, or one with a reasonable expectation of forgiveness, were not deductible.
After much discussion, Congress stepped in with a legislative fix: “The deductibility of business expenses paid with forgiven PPP loans is effective for subsequent PPP loans, as well as for business expenses paid with emergency Economic Injury Disaster Loan (EIDL) grants and targeted EIDL advances.”
Contact Salazar CPA to discuss your specific situation and we can help you navigate these changing times.