New guidance (Revenue Ruling 2020-27) was released earlier this week by the IRS regarding the deductibility of expenses paid with Paycheck Protection Program (PPP) loans. The guidance reiterated the IRS’s position that taxpayers cannot claim a deduction for any otherwise deductible expense if the payment of the expense results in forgiveness of their PPP loan because the income associated with the forgiveness is excluded from gross income.
The guidance states that expenses paid with PPP loans are not deductible in the year the expenses are paid or incurred, if at the end of such year, the taxpayer “reasonably expects” to receive forgiveness of the PPP loan based on the otherwise deductible expenses. The guidance discusses two situations in which a taxpayer receives a PPP loan in 2020 and pays eligible expenses during the year. In one situation the taxpayer applies for forgiveness in November 2020 but has not been informed by their lender by the end of 2020 whether the loan will be forgiven. In the second situation the taxpayer has not yet applied for their forgiveness by the end of 2020 (they expected to apply in 2021), but they knew the amount of qualifying expenses.
The IRS stated that in both situations the taxpayer has a reasonable expectation of reimbursement (through their loan being forgiven) at the end of 2020 and therefore, the deduction of the expenses is not allowed.
With the announcement of Revenue Ruling 2020-27, the IRS also released Revenue Procedure 2020-51, which allows taxpayers to deduct expenses if loan forgiveness is partially or fully denied, or if the taxpayer withdraws their forgiveness application.
If you or your business have reason to believe that a PPP loan will be forgiven in the future, expenses connected to the loan are non-deductible, no matter if you or your business have filed for forgiveness or not. That being said, it is encouraged by the IRS to file for loan forgiveness as soon as possible.
For further questions or concerns, we urge you to connect with your trusted advisor at BerganKDV, or start here.