Yesterday the IRS released a notice clarifying the tax treatment of forgiven PPP loans. The forgiven loans remain income tax free, however the normally tax-deductible wages, mortgage interest, and rents are not going to deductible if the money used to make those payments is forgiven. The bottom line is that a PPP loan will not increase your income taxes.
Normally a business is able to deduct the cost of wages, mortgage interest and rents, however IRS is using a little paid attention to section of the tax code that does not allow a business to double dip deductions on top of tax-free income to justify the notice. By their determination because a business is not taxed on the income from a PPP loan the business cannot also use that same money for a tax deduction.
Several tax writers in Congress have expressed disappointment in the decision and may try to allow these deductions in a future bill. If this happens it would add an additional benefit to the loan program, the tax-free income when used as a salary can reduce taxes paid on other income. As an example if a business received $100,000 PPP loan and used it all on deductible expenses, the company would pay no taxes on the $100,000 and deduct the expenses from another $100,000 in taxable income, reducing the businesses taxes by nearly $30,000 as a pass-through using the effective top tax rate.