IRS Releases Guidance on Tax Treatment of PPP-Funded Expenses

Last week, the IRS issued Revenue Ruling 2020-27, which reiterated its position that taxpayers cannot claim deductions for expenses if the payment of the expense results in forgiveness of a Paycheck Protection Program (PPP) loan.

The PPP loan program was created to provide forgivable loans to small businesses to help them weather the effects of the COVID-19 pandemic. Subject to several provisions, PPP loan recipients can generally receive forgiveness of the debt to the extent the funds were used for payroll, mortgage interest, rent or utilities during the covered period subsequent to the origination of the loan.

The legislation that created the program, the CARES Act, also included provisions that the income associated with the forgiveness of a PPP loan should be excluded from gross income on the borrower’s tax return. The CARES Act does not address whether deductions that would otherwise be allowable under the tax code should be allowed if the expenses are paid with a PPP loan that is subsequently forgiven.

Rev. Rul. 2020-27 also indicates that taxpayers may not claim deductions for expenses funded with a PPP loan if the taxpayer reasonably expects to receive forgiveness in the future. The IRS asserts that even if a borrower has not yet applied for forgiveness, or has applied but has not yet been notified whether they have been approved, the deductions are inappropriate to the extent the taxpayer has a reasonable expectation of loan forgiveness at the end of 2020.

Revenue Procedure 2020-51 contains safe-harbor rules that allows taxpayers who expect their PPP loans to be forgiven after the 2020 tax year and are subsequently denied forgiveness to deduct all or some of the expenses in their original 2020 tax return, an amended 2020 return, or an original tax or information return for the subsequent year.

The AICPA has expressed opposition to the IRS’s position, asserting that the guidance is not consistent with Congress’s intent in the CARES Act. The AICPA is supporting bills that have been introduced in the House and Senate that would ensure PPP loan recipients receive the full benefits intended in the CARES Act. More is likely to come on this topic soon.

Schreiber Accounting and Advisory can help you understand the impact of PPP loan forgiveness on your business with comprehensive tax compliance and planning and virtual CFO services. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.