Co-authored by Edric Martinez, Tax Senior Associate
At a glance:
- Ordinary and necessary business expenses paid for with a forgiven or forgivable PPP loan are deductible
- Loan proceeds may be used to cover payroll and employee benefits, mortgage interest or rent, utilities, and other qualifying expenses
- Businesses need to contact their PPP lender to apply for forgiveness
As of May 9, 2021, the SBA has processed roughly 11 million Paycheck Protection Program (PPP) loans, disbursing $782 billion to small businesses. According to the Coronavirus Aid, Relief and Economic Security (CARES) Act, the legislation that created PPP loans, as long as a business spends the loan proceeds on eligible expenses, the loan can be partially or fully forgiven. In addition, the CARES Act specified that forgiven loans are not taxable income. This raised the question of whether expenses paid for with a forgiven PPP loan would be eligible tax deductions.
For a while, the answer was up in the air. Typically, expenses related to tax-exempt income don’t qualify for a tax deduction. Initially, the IRS stood by that position. Notice 2020-32 stated no deduction would be allowed for any expenses were paid for with forgiven PPP loans — a position that many lawmakers, tax advisors, and small business owners disagreed with.
Fortunately, the COVID-related Tax Relief Act of 2020, part of the Consolidated Appropriations Act 2021, (CAA21) provided some much-needed clarity on the issue. Yes, ordinary and necessary business expenses paid with a forgiven or forgivable loan Paycheck Protection Program loan are fully deductible.
What expenses can PPP loans cover?
Initially, the CARES Act permitted forgiven loan proceeds to be used on a narrowly defined set of expenses. However, subsequent stimulus legislation expanded PPP loan terms. Now, funds from a PPP loan can be used for any of the following purposes:
- Payroll expenses, including salaries and wages, paid time off, and employee benefits
- Mortgage interest
- Operations, including software, cloud computing, human resources, and accounting needs
- Property damages due to public disturbances in 2020 that were not covered by insurance
- Supplier costs
- Personal protection equipment for workers and property improvements to remain COVID-compliant
In addition, the following conditions apply to loan forgiveness:
1. Eligible PPP expenses must be incurred over an 8- to 24-week period, starting from the day the business received its PPP funds.
2. At least 60% of the loan proceeds must be used on payroll costs
3. The business must maintain the number of employees on payroll and maintain at least 75% of each employee’s total salary
How to apply for PPP loan forgiveness
To apply for loan forgiveness, businesses need to contact their PPP lender and complete the correct form.
- SBA Form 3508. This is the standard PPP Loan Forgiveness Calculation Form. All borrowers can use this form, and borrowers who do not qualify to use Form 3508EZ or 3508S must use it.
- SBA Form 3508EZ. This version requires fewer calculations. It’s for borrowers who are self-employed and have no employees or have employees but did not reduce employee levels, wages, or hours.
- SBA Form 3508S. This version of the forgiveness application requires almost no calculations. It’s for borrowers who took out loans of $150,000 or less.
Regardless of which form you use, you must have supporting documentation to support your application. That documentation may include:
- Bank account statements
- Third-party payroll service provider reports
- Payroll tax reports
- Receipts, canceled checks, or account statements documenting employer contributions to employee health insurance and retirement plans
- Mortgage amortization schedules or lender account statements
- Copies of current lease agreements and receipts or canceled checks verifying rent and lease payments
- Receipts, canceled checks, or account statements documenting utility payments
Borrowers who apply for forgiveness using SBA Form 3508S do not have to submit supporting documentation with their application. However, they should maintain all relevant records in case the SBA requests documentation as part of its loan review and audit process.
Once you complete your loan forgiveness application and submit it to your lender with the required supporting documentation, the lender may request additional documentation before submitting your application to the SBA.
Your lender should notify you of the amount forgiven. If the loan is not fully forgiven, they should notify you of the date your first loan payment will be due.
How Holtzman can help
Applying for Paycheck Protection Program (PPP) loan forgiveness requires navigating many rules, requirements, applications and supporting documents. Our team of accounting and tax advisors can help determine whether you qualify for forgiveness and how it might interact with other tax benefits, including the Employee Retention Credit and the Research & Development Tax Credit. Please contact our Tax services team for assistance.
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