Skip Navigation or Skip to Content

New Bill Introduced Allows Small Business Tax Deductions on Forgiven PPP Loans

Members of the Senate Finance Committee introduced the Small Business Expenses Protection Act of 2020 on May 6. The act would permit small business tax deductions for expenses paid with a forgiven Paycheck Protection Program (PPP) loan. If this bill becomes law, it will bring about modifications to the current regulations that surround small business tax-deductible expenses.

The Paycheck Protection Program (PPP)

The PPP is part of the CARES Act, which Congress passed in April as part of its response to the coronavirus pandemic. The program’s goal was to provide loans to small businesses, backed by the SBA, that the government would ultimately forgive. These loans were granted on the condition that they would keep their employees on their payrolls for eight weeks.

The PPP, however, has become controversial. Many small businesses found they were not receiving money because much of it was going to bigger companies. The first $349 billion worth of PPP funding rapidly ran out. Therefore, Congress had to approve another $320 billion in April.

The government has already paid out more than two million loans worth more than $175 billion to small businesses since April 27. This surpassed the total number of loans the PPP made during its first round. The government has estimated the average size of loans in the second round of payments will be $79,000. Nonbanks and lenders have made around 500,000 loans with under $1 billion of assets.

Voiding the IRS’s Notice

On April 30, 2020, the IRS issued a notice stating that businesses could not get a tax deduction for expenses that result in the forgiveness of a PPP loan. On May 4, 2020, Sens. Ron Wyden (D-Ore.) and Chuck Grassley (R-Iowa) wrote a letter to the IRS. The senators, who are members of the Senate Finance Committee, set out their concerns that this guidance opposes their congressional intent. Thus, it makes it more challenging to provide the necessary health-care coverage.

The act would effectively void the notice issued by the IRS. COVID-19 assistance provided through the Paycheck Protection Program would not affect the standard business expense tax deductibility. The senators introducing the bill now hope it will encourage more small businesses to carry on using the PPP funds. Small businesses can use these funds to keep their business afloat and retain employees.

The IRS and Treasury’s Interpretation of the Law

Congress created and passed the PPP with the intent of ensuring small businesses could survive during this crisis. The program would make sure they had the help and liquidity necessary to come through this challenging period. However, the IRS and Treasury have interpreted the law differently. Their interpretation is preventing companies from being able to deduct the expenses linked to PPP loans. This is precisely the opposite of the original intention. Therefore, the senators have introduced this bill to fix the situation.

The PPP’s goal was to allow small businesses to maximize their chances of maintaining liquidity. PPP loans would enable them to retain employees and recover quickly from this pandemic. For the Treasury to offer help with one hand and take it away with the other is counterintuitive. The purpose of the bipartisan bill is to rectify this small business tax deductions error. It will help businesses feel confident in their use of PPP funds.

For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES (844.494.6337).
Payments OnlineTaxCaddy
Secure File TransferWindes Portal