The CAA: How PPP Loans Impact Taxes
The Consolidated Appropriations Act of 2021 (CAA) clarifies the taxability of forgiven Paycheck Protection Program (PPP) loan funds. Below, we outline what you need to know about this new provision.
The CAA clarifies that expenses paid with forgiven PPP loan funds are fully tax-deductible for Federal income tax purposes. This reverses the IRS’s position that the expenses were not deductible.
The CAA also confirms that forgiven PPP loan funds will not be included in the borrower’s gross income. They will be treated as a form of tax-exempt income.
This provision applies to loans issued under the original Paycheck Protection Program and PPP Second Draw loans.
What Do I Need to Do?
If you receive a PPP loan, make sure you stay compliant with the program’s requirements. This includes rules such as using the funds only for covered expenses and maintaining your employee headcount. If you don’t comply with these regulations, your loan forgiveness and resulting tax deductibility may be affected.
Each state may also handle the deductibility of forgiven PPP loan expenses differently. Check with your state for more information on how forgiven PPP loan funds will be deducted at the state level.
For an overview of the CAA and its main provisions, please check out The Consolidated Appropriations Act of 2021 (CAA): What Employers Need to Know.