Is Your PPP Loan Tax Deductible?

We’d like to say, “As another year comes to a close,” but this has been anything but another year. This year, many restaurants reached for the Paycheck Protection Program (PPP), a lifeline that might just pull them through their most difficult year as an entrepreneur.

After months of litigation between news organizations and the Small Business Administration, SBA released a list of the companies that received more than $700 billion in forgivable loans. That database can be seen at

While it’s difficult to pinpoint the exact number, we do know that nearly 50,000 restaurants received more than $150,000. When Restaurant Business analyzed these restaurants, they found at least one-third of them were on the Technomic Top 500 Chain Restaurant Report.

The PPP Loan Goes into Effect

Originally, the intent of the program was to help small businesses survive the lockdowns and restrictions COVID-19 brought with it. Allowable expenses included payroll, mortgage interest payments, utilities, and rent. Operators rehired employees, though their job titles were often shuffled and substituted, some from servers to delivery drivers. In essence, the PPP loan forced restaurants to bring staff back before they had the business to support them.

The original terms of the loan required restaurants to use the money within 8 weeks and spend 75 percent on payroll costs in order to receive complete forgiveness. While Congress changed the guidelines to 24 weeks and 60 percent in June, the updated regulation was too late for many restaurants that had already used up their loan.

Unfortunately, that was in the spring. Now, as winter rolls around, that money has been spent, and businesses are closing once again. Even those that are operating are faced with social distancing requirements, limited dining hours, and wary diners, leaving revenue levels unsustainable.

And while Congress debates another relief bill ad infinitum, hundreds of thousands of small businesses have gone under.

John Pepper, the owner of Boloco, a modern-Mexican restaurant with seven locations across Massachusetts, opened four of his locations after receiving the loan. Now, only one offers dine-in service while another one provides takeout and delivery.

A shareholder update in October revealed challenging times, a reflection of the uncertain climate many, if not most, restaurants find themselves in.

“We remain open in 2 of the 7 locations and have been working on securing agreements with all landlords to either re-open at reduced rents or to close permanently. We have now received forgiveness of some or all of monies owed to 3 landlords, which is still far short of where we need to be to remain viable.”

PPP Loans and Taxes

As the end of the year rolls around, restaurants are now wondering how this loan affects their taxes. Brian Smith, Director of Compliance for Restaurant Solutions Inc. told Restaurant Hospitality, “The whole idea of [the PPP loans] was to help businesses, give them money to stay afloat, and to keep employees on the payroll. In normal operating procedures in past years, the incurring expenses from these expenses were deductible. We thought businesses would get a double benefit: free money and they’d get to deduct expenses on their taxes.’

Thought is the optimum word.

On November 18, the U.S. Treasury and IRS posted a press release clarifying the deductibility of expenses for those that received a PPP loan. In part, it states, “If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. Therefore, we encourage businesses to file for forgiveness as soon as possible.

In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.”

This ruling, in effect, forces many small businesses to pay taxes on the government aid that was intended to help them keep their doors open through the pandemic. Common deductions such as payroll and rent paid for with money from PPP loans, cannot be deducted as expenses.

Leaders of the tax-writing Senate Finance Committee disagree. In a joint statement, Iowa Republican Chuck Grassley and Oregon Democrat Ron Wyden stated, “Since the CARES ACT, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses.”

While the IRS and Treasury ruling is expected to be challenged, its current form increases the tax burden on small businesses that are on the verge of closing.

If Congress and the Trump administration can agree, and the Treasury Department’s ruling is changed, the decision would be retroactive for those that have already filed their taxes. This decision could mean the difference between tax refunds or tax payments for many small businesses.

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