A bipartisan group of lawmakers introduced legislation on May 6 to enable small businesses to deduct their expenses even if they have received a loan from the federal government’s Paycheck Protection Protection Program that was later forgiven.

On April 30, the IRS issued a notice that said small businesses couldn’t deduct these expenses and that no tax deduction is allowed for an expense that’s otherwise deductible if the payment of the expense results in forgiveness of a PPP-covered loan.

On May 6, lawmakers introduced a bill that would effectively nullify the IRS notice by introducing

The Small Business Expense Protection Act, which would clarify the PPP so that small businesses could deduct the expenses they have paid with a forgiven PPP loan from their taxes. Under the bill, the receipt and forgiveness of coronavirus assistance through the PPP would not affect the deductibility of ordinary business expenses.

Senators noted that the goal of the PPP was to maximize small businesses’ ability to maintain liquidity, retain their employees, and recover from the pandemic as soon as possible.

What seemed like a PPP walk in the park is turning into a back alley brawl. IRS said it is going to audit every PPP Loan of $2M or more and threaten to press charges if they find misappropriated funds, and now issuing a notice eliminating deductions. Sounds kind of anti-stimulus. And if your loan is less $2M, don’t be too relieved. A loan less than $2M doesn’t mean you won’t get audited, just not “every” loan will get audited. 

Here’s our Best Practices recommendation: this is not business as usual, get things situated so that you can prove everything was done properly. Guaranteed, the IRS will do things “By the Book”, so dot your I’s and cross your t’s.