IRS Issues Ruling on PPP Loan Forgiveness and Non-Deductible Expenses

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On November 18, 2020, the IRS issued Revenue Ruling 2020-27 (Ruling), which provided an answer to the question that Paycheck Protection Program (PPP) loan borrowers have been asking for months: can borrowers who received PPP loans deduct business expenses if they expect their loan to be forgiven? Unfortunately, the short answer is no. Below is a high-level summary of the implications of this Ruling for borrowers preparing for the upcoming tax season.

Since the IRS issued Notice 2020-32 in May, borrowers have learned that expenses funded by PPP loan proceeds that have already been forgiven are non-deductible. The idea is that borrowers should not be permitted to “double dip” by writing off expenses such as rent and wages, only to have their entire loan ultimately forgiven. By contrast, borrowers whose applications for forgiveness are fully or partially denied may deduct such expenses. This safe harbor provision was discussed in the recently released IRS Revenue Procedure 2020-51.

With the publication of Ruling 2020-27, the IRS has doubled down and extended this prohibition on expense deduction to include two additional scenarios:

  1. A borrower within the calendar tax year incurs expenses that are eligible for forgiveness under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and SBA guidance. That borrower applies for loan forgiveness in November 2020 and meets all required conditions for full forgiveness of the loan but will not receive a decision prior to year-end.
  • Under the new IRS Ruling, this borrower cannot deduct expenses funded by PPP loan proceeds.
  1. The borrower again incurs expenses that are eligible for forgiveness and meets all conditions required for full forgiveness of the loan. However, rather than applying for forgiveness as of year-end, the borrower expects to apply in 2021.
  • This borrower is also prohibited from deducting expenses that were funded by PPP loan proceeds.

In its Ruling, the IRS stated that in both cases, the businesses have a “reasonable expectation” that the loans will be forgiven, which indicates that they should not be able to reap the benefits of expense deductions.  Congress may act to provide relief for these borrowers through potential economic stimulus package, however, it is unclear at this point when such relief might come. We will continue to keep you updated on this matter as new information is provided.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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