On Wednesday, the IRS issued a Revenue Ruling and a Revenue Procedure regarding the deductibility of expenses related to Paycheck Protection Program (PPP) loans. Ultimately, the rulings say that even if forgiveness hasn’t happened, borrowers can’t deduct expenses in the year paid or incurred, if they reasonably believe the loan will be forgiven. What should borrowers do as the year comes to a close and year-end tax planning remains top of mind?
When the CARES Act was signed into law in March, it was clear that the forgiveness of PPP loans would be excluded from taxable income; however, many questions remained regarding the deductibility of expenses paid with the loan proceeds.
In May, the IRS issued Notice 2020-32, which stated that a taxpayer who receives a loan through the PPP is not permitted to deduct expenses that are normally deductible to the extent the payment of those expenses results in loan forgiveness under the CARES Act.
The recent revenue ruling (Rev. Rul. 2020-27) restates the IRS’s official position on the issue of deductibility that expenses paid with PPP loan funds are not deductible. The revenue procedure (Rev. Proc. 2020-51) explains the procedures and statement that needs to be submitted in order for a safe harbor to apply in the situation that borrowers are denied forgiveness or decide not to apply for forgiveness.
We are still awaiting further guidance and clarification to new questions. At this time, our recommendation is to review your specific situation with your accountant and weigh the benefits and risks. As a reminder, all PPP borrowers have 10 months after their covered period ends to apply for forgiveness. As the year comes to a close, it’s critical that borrowers understand all of the available tax filing approaches.