The Internal Revenue Service (IRS) has issued Revenue Ruling 2020-27 to address the question many recipients are asking: Are Paycheck Protection Program or PPP loan expenses deductible if the loan is forgiven or expected to be forgiven.
Revenue Ruling 2020-27
In summary, the Ruling states that if a PPP loan recipient has a reasonable expectation that the loan will be forgiven – even if they have not officially applied for or received forgiveness yet – they should not deduct otherwise eligible expenses paid for with PPP loan funds. The Ruling also states that if a borrower has “a reasonable expectation of reimbursement,” the deduction is inappropriate.
Taypayer Interpretation
Many taxpayers interpreted the prior notice from the U.S. Treasury regarding deductibility of eligible expenses in cases where the loan was forgiven to mean that forgiveness must occur for the rule to apply. For many businesses, forgiveness will not happen until 2021, so eligible expenses paid in 2020 were believed to still be deductible. The new guidance from the IRS explicitly states that a deduction cannot be taken if the borrower “reasonably expects” to receive loan forgiveness, even if an application has not been submitted before the end of the year.
Impact on Year-End Tax Planning
If you could deduct eligible expenses paid with PPP funds as business expenses in 2020, and include the amount forgiven as discharge of indebtedness income in 2021, the net impact over the two year period would be zero, but small businesses could benefit from the lower taxable income in 2020. The prohibition of this benefit by Revenue Ruling 2020-27 results in immediate concerns for business owners related to year-end tax planning.
Potential Changes By Congress
There are lobbying efforts by various organizations that believe this was not the intent of Congress – including the American Institute of Certified Public Accountants (AICPA) – for recipients of PPP loans to be allowed to deduct the eligible expenses associated with their loans for tax purposes. The Senate has introduced the bipartisan Small Business Expense Protection Act of 2020, and the House may submit similar legislation.
We will provide updates as there are additional developments. Check our COVID-19 Resource Center for ongoing news and resources.