The tax section of the new stimulus Act, the Tax Relief Act of 2020, cleared up a very important question about PPP loans. Normal business deductions, such as payroll, mortgage interest, rent and utilities, are deductible even if they are attributable to forgiven PPP funds. The latest Act also expanded the types of expenses that are forgivable under the PPP program to cover operation expenditures such as business software or cloud computing services, property damage costs due to public disturbances, supplier costs, and COVID-19 worker and customer protection expenditures.
The IRS adopted the new deduction rule in Rev. Rul. 2021-02, which invalidates the agency’s earlier pronouncements denying those deductions. As a result, it is official: no deduction will be denied, no tax attribute will be reduced and no basis increase will be denied to PPP loan recipients due to the exclusion from gross income of a forgiven PPP loan. This change applies to taxable years ending after March 27, 2020.
Allowing these deductions reinstates a substantial benefit of the COVID-19 relief programs and should help U.S. businesses maintain financial health.