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Update on Treatment of PPP Covered Expenses (now fully deductible) & More Good News for SBA Debt Relief Payments

Money and Statue of Liberty

Many of you have read our recent blog regarding the position taken by the IRS on the deductibility of PPP covered expenses. In IRS Revenue Ruling 2020-27 issued in the fall, the IRS indicated that those covered expenses typically would not be deductible. However, the recently signed COVID-19 Relief Act overrides that Revenue Ruling and provides that the expenses are deductible even though the loan proceeds are not includable in income.

SBA Debt Relief Payments are extended and considered tax-exempt income

As part of the CARES Act passed in March 2020, certain loans administered under the Small Business Administration (SBA) loans received six months of debt relief payments. This assistance was automatic, and there was no application. Borrowers had payments made on their behalf directly to their lenders by the SBA. The debt relief was not merely a deferral but was the actual loan payments of principal and interest.

Although uncommon, this is not the first time that government units have made SBA loan payments for borrowers in the wake of a disaster. In prior guidance, the IRS advised that the loan payments were includable in income by the taxpayer-borrower on whose behalf the payments were made. Since the entire payments were included in income, the interest paid on the borrower’s behalf did give rise to a deduction.

The Act also overrides prior IRS guidance and expressly indicated these debt relief payments were not includable in income. Furthermore, it states that no deduction shall be denied by reason of this exclusion.  Bottom line: the borrower will still be able to deduct the interest expense.

Extension of the debt relief program

All borrowers with qualifying loans approved by the SBA prior to the CARES Act will receive an additional three months of debt relief payments starting in February 2021. Going forward, those payments will be capped at $9,000 per borrower per month. After the three-month period, the hardest hit borrowers may still be able to receive an additional five months of debt relief.  

We will continue to update you on any further guidance on the SBA’s loan payment deferral relief as information becomes available.

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