No Deduction Denied

With the 2020 tax season bearing down upon us, the Internal Revenue Service has issued some good news for small business owners who received PPP Loans under the 2020 Cares Act. In a policy shift that came after Congress passed new legislation last month, the IRS will now allow businesses that got their Paycheck Protection Program loans forgiven to write off expenses paid for with that money. This decision overrides previous rules stating that recipients of PPP loans that had been forgiven couldn’t claim deductions for the wages, rent, utilities and other expenses covered by the loans. 

In a recent statement, the IRS said, “no deduction is denied, no tax attribute is reduced, and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan.”

As an article at points out, “The change is widely regarded as a victory for small businesses, which can use tax-free money to generate more breaks, something that’s typically prohibited under the Tax Code. Lawmakers said allowing the deductions was necessary to keep small businesses afloat amid waves of restrictions and weakened consumer spending resulting from the coronavirus pandemic.”

This IRS change of heart means that some businesses could end up paying a negative tax rate on their PPP money — meaning the tax benefits outweigh the amount of their loan. For business owners paying the top tax rate, it generally means they could save as much as $37 on their taxes for every $100 of tax-free PPP money they received.

Without question 2020 was a tough year for many small businesses. If you survived and were the recipient of a PPP loan, you may get to take another big sigh of relief as the tax breaks help you see the light at the end of the tunnel. If you need help deciphering what this change means for your business taxes this year, give us a call.

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