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IRS Releases New Guidance on Deductibility of Expenses Paid with PPP Funds

November 19, 2020

The Internal Revenue Service has clarified the deductibility of expenses paid with paycheck protection program (PPP) loan funds. Let’s take a look.

The IRS released two significant communications today Revenue Ruling 2020-27 and Revenue Procedure 2020-51 which address issues related to the deductibility of expenses paid with PPP funds.

Some helpful background

As you may be aware, earlier this year the IRS issued revenue ruling 2020-32 which reminded taxpayers that under the tax code, expenses paid using tax exempt income (i.e. forgiven PPP loan funds) were non-deductible. There would be no confusion if a taxpayer received PPP forgiveness in the same year the expenses were paid. However, the ruling was unclear what would happen if the taxpayer incurred the expenses in one year (2020), but received forgiveness in the next year (2021).

What’s new?

The ruling issued today, 2020-27, addresses this issue. The ruling essentially says that if a taxpayer reasonably expects that the expenses paid with PPP funds will ultimately qualify for forgiveness, then they are non-deductible in the year they were incurred. Therefore, if you used all of your PPP funds in 2020 and expect to receive full forgiveness, those expenses are not deductible, regardless of whether or not you have applied for or have received forgiveness notification as of the end of 2020.

Now many are thinking, what happens if my loan forgiveness is partially or fully denied in 2021, after I have filed my 2020 return? Revenue Procedure 2020-51 address that question and establishes a safe harbor for those taxpayers whose loan forgiveness applications are partially or fully denied, or who decide not to apply for forgiveness after filing their 2020 tax return. The safe harbor allows the taxpayer to take the deduction for denied or withdrawn loan forgiveness amounts on either their 2020 or 2021 income tax return. It is the taxpayer’s choice on whether or not they want to take the deduction in 2020 via an amended income tax return or they can deduct those expenses on their 2021 income tax return.

Important to note, these expenses may ultimately become deductible with a future act of Congress. Lawmakers from the beginning have stated the intention was not only for the forgiveness of the loan to be tax free income, but also for the forgiven expenses to be deductible for tax purposes.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward during this unprecedented crisis.

Need further PPP guidance? Check out our PPP Info Center.

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