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Payroll Protection Program

The IRS has added a new wrinkle to the Small Business Administration's Paycheck Protection Program.

The new guidance, issued Nov. 18, offers additional details on an earlier IRS decision from April 30 that decreed that normally tax-deductible items will no longer be deductible if they were paid for with PPP funds. Now, the tax agency has specifically prohibited any small business that has a reasonable expectation of PPP loan forgiveness from deducting those expenses in its 2020 taxes — even if it takes until 2021 or 2022 to reach actual forgiveness, or if the business has yet to even fill out a forgiveness application.

For businesses, that likely eliminates a potential strategy to defer their 2020 tax liabilities for a year while they wait to get their loans forgiven. This new rule — yet another wrinkle for small businesses to navigate in what's already been a string of contradictory government guidance around the PPP — is also harder to undo without congressional action, according to tax experts. And it doesn't make things much easier for the IRS, they said.

It’s unclear whether Congress will act. The American Institute of CPAs recently called upon Congress to pass bipartisan legislation that would allow small businesses to deduct expenses paid for with PPP funds. But that legislation — the Small Business Expense Protection Act of 2020, introduced in both the Senate and the House in May — has not moved out of committee.