The Consolidated Appropriations Act, 2021, P.L. 116-260, enacted on Dec. 27, 2020, resolved the issue of whether taxpayers can take deductions for expenses paid for with forgiven Paycheck Protection Program (PPP) loans. The act clarified that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. It also clarified that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower's assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The act provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.
While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April 2020, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).
In November 2020, the IRS then expanded on this position by issuing Rev. Rul. 2020-27, which held that a taxpayer computing taxable income on the basis of a calendar year could not deduct eligible expenses in its 2020 tax year if, at the end of the tax year, the taxpayer had a reasonable expectation of reimbursement in the form of loan forgiveness on the basis of eligible expenses paid or incurred during the covered period.
The AICPA disputed this interpretation of the CARES Act loan forgiveness rules, arguing that it was not Congress's intent to disallow the deduction of otherwise deductible expenses. Congress has now agreed with that position.
In addition to the clarification about the deductibility of expenses paid with PPP funds, the act clarifies that gross income does not include forgiveness of certain loans, emergency Economic Injury Disaster Loan grants, and certain loan repayment assistance, each as provided by the CARES Act. The act also clarified that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income by this section and that tax basis and other attributes will not be reduced as a result of the exclusion of those amounts from gross income.
The act also gives Treasury authority to waive information filing requirements for any amount excluded from income by reason of the exclusion of covered loan amount forgiveness from taxable income, the exclusion of emergency financial aid grants from taxable income, or the exclusion of certain loan forgiveness and other business financial assistance under the CARES Act from income.
The many tax provisions in the Consolidated Appropriations Act, 2021, will be discussed in more detail in the March issue.