Tax Consequences of PPP Forgiveness

by | Nov 24, 2020 | Business Services

Whether you have already had your Paycheck Protection Program (PPP) loan forgiven, or you are waiting for news from your lender, it is important to start planning ahead for the tax consequences of PPP forgiveness.  Fortunately, there is something you can do to ensure that your allowed expenses are treated the way Congress intended.

When Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, it made it very clear that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Specifically, a recipient of a PPP loan was eligible for forgiveness of indebtedness for amounts equal to certain payroll, mortgage interest, rent, and utility payments made during a prescribed period, with any resulting canceled indebtedness excluded from the borrower’s taxable income.

Despite Congress’s intentions, the IRS issued Notice 2020-32 denying tax deductions for amounts paid under the PPP that were forgiven.  The IRS claims that this prevents taxpayers from receiving a double benefit.  Despite the IRS’s misinterpretation, there is a still a way you can help protect your business.  Tell your members of Congress to support small businesses by quickly passing S. 3612 and H.R. 6821, the Small Business Expense Protection Acts of 2020, or H.R. 6754, the Protecting the Paycheck Protection Program Act. 

This legislation will ensure that PPP forgiveness does not result in an unjust, unintended burdensome tax cost for your organization at a time that many small businesses cannot possibly afford it.  The sooner this legislation is passed, the sooner small businesses can focus on future growth and success in these challenging economic times.  In order to save time, I have attached a draft email below and you can find your U.S. Senators’ and Representatives’ contact information at here: Members of the U.S. Congress

Sample Text

I am writing you today to strongly encourage you to include in any year-end, must-pass legislation language that will allow millions of small business owners a tax deduction for expenses paid with Paycheck Protection Program (PPP) forgiven loans.

Bills have been introduced in the Senate (S.3612 sponsored by Senator Cornyn (R-TX)) and in the House (H.R. 6821 sponsored by Representative Holding (R-NC) or H.R. 6754 sponsored by Representative Fletcher (D-TX)) that would ensure that PPP loan recipients are provided the full benefits intended in the CARES Act.

All Americans have been impacted by the COVID-19 pandemic, and your actions in Congress have provided much-needed assistance to millions of struggling businesses.

It is important that you ensure that these same businesses are not also subject to additional and unexpected taxes as they continue to struggle to survive.

Borrowers who are eligible for forgiveness of their PPP loans have spent the funds as the program directed. Unless they are allowed to deduct these expenses, they may be forced to spend additional funds to pay taxes on the loan proceeds – funds they may not have. Passing this legislation as quickly as possible will provide small business owners more certainty as they focus on year-end business planning that is especially important in these challenging economic times.

I ask that you contact your Senate and House leaders to ensure that PPP loan forgiveness deductibility language is passed by Congress before the end of the year.

More about Chad W. Nally

More about Chad W. Nally

Chad Nally is a Partner at Burke Costanza & Carberry, LLP and a member of the firm’s litigation and business practice groups. Chad’s practice primarily focuses on representing both businesses and individuals in the areas of creditor’s rights, collections, and commercial litigation. Chad is also a disabled veteran who assists other veterans with their legal needs.