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Are Expenses Paid With PPP Loan Proceeds Tax Deductible?

Business Loans 101

Typically when a person or company borrows money to use for business operating expenses, they are (1) required to pay back the amount borrowed, (2) required to pay interest on the amount borrowed which is tax deductible and (3) allowed to deduct for tax purposes, the proceeds used to purchase goods and services.

Now that you know how a business loan works, let’s throw a wrench into the mix.  What happens if the company that borrowed the funds, does not have to pay them back?  This is a question you have probably never thought about until now.  After all, who is willing to lend money without expecting to be paid back?

Free Money (Maybe)

The answer is…The U.S. Government, specifically the Small Business Administration (SBA).  Via the CARES Act, the U.S. government created various programs to help businesses cope with the effects of COVID-19.  The Paycheck Protection Program (PPP) allows companies to borrow funds to use for payroll, payroll taxes, employee benefits and a few other operating expenses such as rent and utilities.

Not only does the PPP program provide loans to businesses in need, in many cases these loans are forgivable up to 100% of the amount borrowed.  Now back to the information you saw in the opening of this article.  A company that borrows money (1) MAY NOT be required to pay back the funds and if so (2) WILL NOT pay interest in the funds borrowed.  This leaves the question…are expenses paid for with loan proceeds still deductible?

More Good News (Maybe)

Simple accounting (for those of us that practice in the area) dictates that for a loan to be forgivable, you reduce the loan amount on the balance sheet and REDUCE the expense paid on the profit and loss statement.  To put simply, not only would the expense not be deductible, but you would be lowering your deductible expense by the amount paid with the “free” money you received in PPP loan proceeds.

In August of 2020, over 170 organizations submitted a letter to Congress requesting that PPP loan proceeds that are forgiven be excluded from taxable income.  This means that (pending Congressional approval) if the loan proceeds are excluded from taxable income, they are “ignored” both for income and expense purposes.

Accountants have to be careful not to “double dip” when recording revenue and expenses.  In this case, we are hoping that Congress allows businesses to not only benefit from a forgivable loan but also to deduct expenses paid for with the forgivable loan proceeds.

It remains to be seen if this request will be enacted into law…fingers crossed.

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