The U.S. Treasury Department and Internal Revenue Service (IRS) released guidance clarifying the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received.
Because businesses are not taxed on the proceeds of a forgiven PPP loan, expenses paid for with loan funds are not deductible. The U.S. Department of the Treasury’s statement on the guidance suggests, “This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible.”
In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.
“Today’s guidance provides taxpayers with greater clarity and flexibility,” said Secretary Steven Mnuchin. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”
Construction contractors took the largest portion of any segment of the economy from the $525 billion in PPP loans the Small Business Administration issued. The program was part of the federal government’s coronavirus relief legislation that began in April. It money was loaned under conditions that would allow forgiveness if it was used in specific proportions just for payroll and certain expenditures like rent and utilities. Expenses that are normally deductible business expenses.
Joseph Natarelli, leader of the national Construction Industry Practice group at accounting firm Marcum, told Construction Dive that many of his clients are considering not applying for PPP forgiveness in order to avoid a hefty tax bill.
“They’re saying, ‘If I knew then what I know now, then I wouldn't have taken the loan and I would have had to lay people off,’” he said.