New IRS Efforts to Destroy Tax Deductions for PPP Paid Expenses
Effect on You
You continue to come out ahead if you can’t deduct some or all of the expenses you paid with the PPP money.
Remember, you don’t pay taxes on the income. You just can’t deduct the expenses.
Example. John’s C corporation gets a $100,000 PPP loan that is forgiven, making it not taxable. With this money,
the corporation covers $100,000 of its payroll, which is not deductible, costing the corporation $21,000 in taxes. The corporation is ahead by $79,000.
Proprietors and Partners
The self-employed taxpayer with no employees has his or her loan forgiven based on his or her 2019 Schedule C net income.
There’s no spend on payroll. In its three “you can’t deduct it” judgments (Revenue Ruling 2020-27, Revenue Procedure 2020-51, and Notice 2020-32), the IRS gives no guidance on how it will treat the money spent by Form 1040 Schedule C filers other than any spend on rent, interest, or utilities—which, of course, would be non-deductible. But most proprietors with no employees obtain full forgiveness with no spend on rent, interest, or utilities.
For now, it appears Form 1040 Schedule C filers have the equivalent of the Monopoly game’s “get out of jail free” card. The same is true for partnerships and distributions to partners.
Potential Trouble for Your Section 199A Deduction
Based on what we know at the moment, if your Section 199A deduction depends on payroll, your inability to deduct payroll costs paid with PPP money will cost you some of your Section 199A deduction.
What to Do Now
Join with hundreds of thousands of business taxpayers and tax professionals who are urging lawmakers to fix the non-deductibility issue.
To help encourage the action you desire (whether you’re for or against deductibility), get in touch with your state’s lawmakers.
S. 3612 is the Senate bill to make the PPP forgiveness money used to pay business expenses tax deductible.
To express your yea or nay on S. 3612, contact your senators. You can find them at this link: https://www.senate.gov/senators/contact.
H.R. 6821 is the House bill to make the PPP forgiveness money used to pay business expenses taxdeductible.
To express your yea or nay on H.R. 6821, contact your representative. You can find him or her at this link: https://www.house.gov/representatives