Home Blog Paycheck Protection Program Ppp Tax Treatment For Federal...

Paycheck Protection Program (PPP) Tax Treatment For Federal & State Taxes

Mark Higley, vice president of Regulatory Affairs has analyzed the Paycheck Protection Program (PPP) Tax Treatment for Federal and State Taxes. Below is the summary of the federal taxes. For the full analysis and commentary, please click HERE


On January 6, 2021, the IRS released Revenue Ruling 2021-02 that declares its previous Notice 2020-32 superseded. Notice 2020-32 stated expenses paid with PPP loan proceeds expected to be forgiven were not deductible. However, the Consolidated Appropriations Act “CAA 2021” clarified Congress’ original intent and codified the deductibility of expenses paid with PPP loan proceeds expected to be forgiven in addition to the CARES Act provision that forgiven PPP loan proceeds are excluded from taxable income. This applies to all borrowers, old and new, regardless of the status of their forgiveness applications.

Before this change in the law, borrowers believed they were being penalized for applying for forgiveness because the non-deductibility of forgiven expenses would inflate their income and increase their tax liabilities due.

The recent stimulus legislation updated the Cares Act passed in March 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,” the IRS said in a statement.

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.