IRS Guidance on PPP Expense Deductibility
By: Catalin Clarke, CPA
The IRS has issued further guidance on the forgiveness, or lack thereof, for funds received under the Paycheck Protection Program (PPP).
From the taxpayers’ understanding, the way the PPP program was outlined to work was that businesses could borrow money and, assuming it was spent on qualifying expenses, the loan would be forgiven. If the loan was not forgiven, a 1% interest rate would be apply. The forgiven loan proceeds would not be considered cancellation of debt (COD) income.
However, in Rev. Rul. 2020-27 the IRS stated that any expenses paid for with forgiven PPP funds will be non-deductible. So even though any forgiven PPP loan isn’t income, the expenses paid with it are non-deductible. This rule also applies if a taxpayer has not yet applied for forgiveness but reasonably expects the loan to be forgiven at year end.
Should the loan not be forgiven, the expenses are generally deductible. Rev. Proc. 2020-51 provides a safe harbor allowing taxpayers to deduct these expenses based on the following conditions:
The expenses are paid or incurred during the taxpayers 2020 tax year;
The taxpayer received a covered PPP loan that the taxpayer expected to be forgiven at the end of 2020; and
After the year end the PPP loan was not forgiven – either due to disallowed forgiveness or the taxpayer decides to not seek forgiveness of the loan.
A special election containing certain information must be made with the return in order to qualify for this safe harbor.
The long and short of the situation is that PPP loans can be forgiven and not technically considered cancellation of debt income. If the loan is forgiven, or is expected to be forgiven by the taxpayer, the expenses paid by the forgiven funds are non-deductible. If the loan is not forgiven, the expenses may be deducted, but a statement must be included with the tax filing.
The AICPA and its partners have issued statements urging Congress to support expense deductibility, as explained in their press release from November 23: “Although the intent of the CARES Act was clearly to allow the deductibility of expenses related to loan forgiveness, the statue was silent. However, the publication of IRS Notice 2020-32, and more recently Rev. Rul. 2020-27, settled this policy by denying borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness.”
As with all things tax this is not to be considered specific advice – please consult your tax advisory team at The Doty Group for further guidance. We remain dedicated to keeping our blog live with the latest updates on PPP rules.