Good News! Business Owners Who Took PPP Will Get to Deduct Expenses After All
On Dec. 21, Congress finally delivered the news that struggling business owners were waiting for: They will be allowed to deduct the expenses they covered with loans from the Paycheck Protection Program on their taxes for 2020. Business owners now can breathe a sigh of relief.

The 2020 tax season now looks a lot less bleak for those business owners who used Payroll Protection Program (PPP) money to cover their expenses to keep going during the coronavirus pandemic. On Dec. 21, Congress clarified rules on the program’s tax ramifications, leaving thousands of small-business owners the winners.
The months-long battle between the legislators who wrote the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the IRS appears to be over. (To read about the fight and how it affected business owners, check out IRS Leaves Business Owners Who Took PPP in a Tax Quandary.) Both the House and Senate have voted to approve the “Consolidated Appropriations Act, 2021.” President Trump signed it into law about a week later, after wrangling over the amount of the stimulus payments.
Among the Act’s many provisions, is a subsection called the “Covid-related Tax Relief Act of 2020” (which starts on page 1,965 for those reading the full text). Under Section 276, Congress clarifies the tax treatment of forgiven PPP loans and the deductions paid by such loans.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Recall that the original Section 1106(i) of the CARES Act included language excluding forgiven PPP loan proceeds from taxable income but was silent on deductibility of expenses paid with those same proceeds. The Tax Relief Act amends the CARES Act to address this gap (which the IRS attempted to use as a backdoor to tax business owners on the relief funds’ benefits) with the bolded portion below:
TAX TREATMENT—For purposes of the Internal Revenue Code of 1986—
(1) no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in subsection (b),
(2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1) ….
Although many (including myself) believe Congress made its original intent clear regarding taxability of PPP funds (and deductions) in the CARES Act text, subsequent positions taken by the IRS raised eyebrows – and questions – and, in the process, gave already-stressed small-business owners more to worry about.
Apparently wishing to leave no room for further misinterpretation, Congress went into greater detail with the Tax Relief Act, including additional language directed to pass-through income and tax basis of ownership interests. Additional provisions state:
(3) in the case of an eligible recipient that is a partnership or S corporation—
(A) any amount excluded from income by reason of paragraph (1) shall be treated as tax exempt income for purposes of sections 705 and 1366 of the Internal Revenue Code of 1986, and
(B) except as provided by the Secretary of the Treasury (or the Secretary’s delegate), any increase in the adjusted basis of a partner’s interest in a partnership under section 705 of the Internal Revenue Code of 1986 with respect to any amount described in subparagraph (A) shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness described in subsection (b).
This last part – “except as provided by the Secretary of Treasury” (the department that oversees the IRS) worried me, and I consulted with a tax expert, Rain Hughes, expert tax education provider and CEO of Fast Forward Academy, for insight. Hughes explains:
This language means that a partner’s tax basis shall increase by the distributable share of deductions attributed to forgiveness. This is meaningful because a taxpayer's adjusted basis affects the taxation of distributions, the ability to recognize losses, and the amount of gain/loss recognized on disposition.
In other words, this language helps ensure business owners who receive the benefit now will not end up losing it in the form of capital gains later. This language prevents an end-run in another form of tax.
This is great news for business owners all over the country (including many of my clients) who took advantage of the CARES Act’s Payroll Protection Program to actually protect their payroll employees by keeping them employed earlier this year.
Imagine the struggling business owner (dentist, pediatrician, autism school, restaurant owner, or insert your own business) relying on PPP relief, who borrowed $250,000 and did not lay off any employees, even though business revenue dropped off substantially because everyone stayed home from April through July. If the PPP worked as intended, those proceeds helped carry the business through until things picked up by September. Everything may be looking good for a break-even year and a fresh eye toward a better 2021 – until the owner realizes she has an additional $250,000 in taxable income for 2020 and not enough in the bank to pay the tax bill. The ultimate irony would have had the IRS attempt to do what the coronavirus could not by putting those owners deeper in debt or out of business.
Thankfully, business owners no longer need to worry about such an absurd scenario, and we can now focus on a stronger recovery in 2021. Now that the president signed the Act into law, we can all breathe a sigh of relief.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Eric Boughman is a founding partner of ForsterBoughman, a Central Florida law firm, where he leads the firm's health care and technology practices. He helps solve complicated legal issues for health care professionals and medical groups, businesses and business owners, investors and entrepreneurs.
-
Dow Rips 846 Points to New All-Time High: Stock Market Today
Fed Chair Jerome Powell seems ready to cut interest rates in the fall but will still rely on incoming economic data about inflation and employment.
-
Test Out Your Retirement Before You Call It Quits
It's not easy to take a retirement back. Before you make the plunge, test the waters with these tips.
-
When You Need Capital Quickly, Think 'Ready, Set, Fund': A Financial Adviser's Strategy
Investors must be able to free up cash to meet short-term needs from time to time. This strategy will help you access capital without derailing your long-term goals.
-
I'm an Estate Planner: Moving Family Assets to a Safe Haven Abroad Could Be a Huge Headache for Your Heirs
In troubled times like these, wealthy clients may seek financial refuge outside of the U.S. But that could cause more tax and estate problems than it solves.
-
Powell Signals Rate Cuts in His Jackson Hole Speech. Here's What Wall Street is Saying
In his speech at the Jackson Hole symposium Friday, Fed Chair Jerome Powell said current conditions "may warrant" rate cuts.
-
Fall Is Tax Time? Yes! Act Now to Make Needed Adjustments
Review your withholdings, contribute to tax-saving HSA and FSA accounts, manage a bonus' impact and adjust for major life events such as weddings and job changes.
-
Board Service in Retirement: The Best Time to Join a Board Is Before You Retire
Many senior executives wait until retirement to take a seat on a corporate board. But making this career move early is a win-win for you and your current organization.
-
A Financial Professional's Take on Long-Term Care Insurance: Buy or Not?
Unless you have about $6,000 burning a hole in your pocket every month, you should make a plan in case you need long-term care. Luckily, you have options.
-
How to Unearth Sustainable Investment in Mining: A Financial Professional's Guide
Mining is likely to play a critical role in the global transition to more environmentally friendly energy resources. Here's how you can balance the opportunities and the risks.
-
Don't Be a Sucker: The Truth About Guarantor and Cosigner Agreements
There are significant financial and relationship risks involved if you agree to be a cosigner or guarantor. Make sure you perform your due diligence, and know exactly what you're getting into, before agreeing to such a commitment.