The year 2020 didn’t go as planned, and its impact is clearly visible on small businesses. Because of the pandemic, the Paycheck Protection Program (PPP) was introduced as a part of the CARES Act that aimed to revitalize struggling businesses. PPP loans helped businesses that lost revenue in 2020, helping many stays afloat. However, it did create some confusion over loan forgiveness and tax deduction. For a long time, the IRS and Treasury stood by the fact that expenses that were part of the forgivable PPP loan were non-deductible.
After witnessing protests from the American Institute of CPAs, and other industry groups, the IRS has now shifted its stance on tax-deductible expenses. According to the new Revenue Ruling 2021-02, expenses covered by the forgivable PPP loan are indeed deductible on tax returns. The new ruling is in line with the changes reflected in The COVID-related Tax Relief Act of 2020. The change comes into effect for tax years ending after March 27, 2020.
Allowable Expenses For PPP Loan Forgiveness
A business will be eligible for PPP loan forgiveness if it can show correct expenses. Most of the categories were part of the original PPP rules but a few have recently been added to expand the scope. These include:
- Expenses related to payroll, rent, covered mortgage interest, and utilities.
Costs related to employee protection equipment following the health and safety rules.
Cost of property damage and vandalism due to the civil unrest in 2020, that were not already covered by insurance companies.
- Cost of supplier goods needed to run businesses provided the transaction existed before receiving the loan.
Business operation expenditure such as software and cloud services, human resources, payroll tracking, etc.
- Businesses must spend the required 60% of the loan amount on payroll in order to qualify for loan forgiveness. They also need to do so between a chosen period of 8 to 24 weeks. Borrowers with a loan amount of $150,000 or less need to produce a single-page form detailing loan amount, payroll transaction, and the number of employees the borrower could retain within the time frame. The simplified form should be available soon.
- Forgiven PPP loans will help businesses run by underserved communities. The newly introduced categories of eligible expenses are also going to help struggling businesses minimize the loss they have incurred during the pandemic.
Matt Brady, CPA
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