Long Awaited Guidance Concerning the Timing of Tax Deduction Disallowance and PPP Loan Forgiveness
The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27, 2020. Included as part of the CARES Act was the Paycheck Protection Program (PPP) loan program. Under the program, amounts borrowed by eligible borrowers could be forgiven for the payment of eligible expenses during the “covered period.” The CARES Act further provided that amounts ultimately forgiven would be excluded from gross income. There was no mention relative to the impact of loan forgiveness on otherwise deductible expenses.

On May 2, 2020, the Department of Treasury and the Internal Revenue Service released Notice 2020-32, which clarified that no deduction would be permitted for an eligible expense used as part of PPP forgiveness. Since the release of Notice 2020-32, taxpayers and tax professionals have been left to wonder when otherwise tax deductible expenses are to be disallowed when the expenses paid and PPP loan forgiveness occur in different tax periods. That question appears to now be addressed by the Internal Revenue Service through Rev. Rul. 2020-27 and Rev. Proc. 2020-51 issued on November 17, 2020.

Unfortunately, as described below, this clarity provides for disallowance, in most cases, of the deductions in the 2020 tax year.

The IRS guidance provides that regardless of whether a taxpayer applies for PPP loan forgiveness or not by December 31, 2020, if the taxpayer has a “reasonable expectation” of reimbursement of 2020 eligible deductible expenses paid or accrued in the 2020 tax year, in the form of covered loan forgiveness, the taxpayer may NOT deduct those expenses in the 2020 tax year. 
This guidance does provide for the appropriate deduction of eligible expenses in the 2020 tax year if forgiveness of the PPP loan, in whole or in part, was denied (the portion of the loan denied forgiveness is the deductible portion), or if the taxpayer irrevocably decides not to seek forgiveness of some or all of the covered loan.
Taxpayers should be alert to the impact of disallowed deductions on their 2020 estimated taxes. Please do not hesitate to contact us with any questions you might have regarding PPP loan forgiveness and/or the impact of disallowed deductions.
For more details regarding this new guidance, contact your trusted ACT client service representative, or email us at info@actcpas.com.