On December 21, 2020, the U.S. Senate and House of Representatives voted to approve the Consolidated Appropriations Act of 2021.
The legislation ensures tax deductibility for business expenses paid with forgiven Paycheck Protection Program (PPP) loans, as well as expenses for which a business received the EIDL Advance Grant.
Sec 278 of Subtitle B – COVID-related Tax Relief Act of 2020 in the Act confirms this treatment which was advocated for by multiple industry groups and congress members.
- No amount shall be included in the gross income of a borrower by reason of forgiveness of indebtedness described in section 1109(d)(2)(D) of the CARES Act,
- 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)
This change in the treatment will nullify previously issued IRS guidance by the IRS including the recent Revenue Ruling 2020-28 and Revenue Procedure 2020-51.
Because of this change by Congress which changes the previous position taken by the IRS, a taxpayer will be receiving the PPP funds as a tax-free grant. The same tax treatment will apply for economic injury disaster loan advances.
These changes relate to only Federal and New York State tax laws and may not automatically apply to New York State or any other state taxing agencies. For New York State, per guidance issued January 13th, 2020, tax treatment of all PPP loans and EIDL advances will follow federal treatment.
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