On June 30th the IRS issued Notice 2020-32. It stated that if a business took PPP funds and decided to accept forgiveness, then standard deductions would not be allowed.
Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.
So, business owners who took PPP had to figure out what was more financially valuable to them, PPP loan forgiveness or taking the standard deductions.
On November 18, 2020, the IRS released another notice, 2020-27, clarifying PPP taxable income and deductible items.
The notice indicates that a business filing calendar year taxes, that reasonably expects to have their PPP loan forgiven, cannot claim some expense deductions – even if the PPP loan has not yet been forgiven or the borrower has not applied for forgiveness.
The expenses addressed are: payroll costs, interest on mortgages, utility payments, and rent.
The notice further clarifies taxable income under the CARES Act. There is a possibility that since PPP is excluded from gross income, even if you don’t apply for forgiveness, you will not be allowed to take expense deductions on the items listed above.
If you or a client has taken a PPP loan, you would be well advised to consult with your CPA prior to filing 2020 income taxes.