By Mark Dunning
Certain expenses related to the Paycheck Protection Program (PPP) are now deductible, the result of tax changes found in the year-end 2020 relief package.
The Consolidated Appropriations Act of 2020 (enacted December 27, 2020) and related guidance (Revenue Ruling 2021-2) amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to say that 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. This change overrides earlier IRS positions, making Notice 2020-32, 2020-21 and Rev. Rul. 2020-27 obsolete, that disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan.
The Takeaway
Under the ruling and subsequent IRS guidance, the R&D credit will not be decreased due to the government funding for PPP loans. In other words, PPP loans are deductible, with no attributes reduced, for taxable years ending after March 27, 2020.
This is welcome news for businesses engaged in U.S. innovation, the self-same businesses expected to spur recovery efforts. An earlier revenue ruling in March 2020 (Notice 2020-32) said PPP loans would not be deductible. It qualified that any wages paid to employees using forgiven PPP loan proceeds would not have been eligible as QREs, thus, decreasing federal and state R&D credits. In the initial guidance, any wages paid to employees using forgiven PPP loan proceeds would not have been eligible as QREs, thus, decreasing federal and state R&D credits. This interpretation reflected the Internal Revenue Code Section 41(d)(1)(A), which stated a taxpayer cannot claim an R&D tax credit on expenditures (employee wages tend to be a large component of the qualified research expenses) that are not deductible.
Reach out to Mark Dunning with questions or visit IRS.gov for more information.
Contact Mark Dunning, lead partner at TaxOps Minimization, at mdunning@taxops.com.
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