On November 18th, the IRS issued Revenue Ruling 2020-27 that addresses the deductibility of expenses paid for using PPP funds. The ruling made it clear that the IRS is not changing its position on the issue. Any expenses paid for using PPP funds will not be deductible as long as the taxpayer reasonably expects to receive forgiveness of their PPP loan. This applies to all expenses, including payroll expenses, but can be limited if the taxpayer does not reasonably expect to receive full forgiveness.
The timing of the forgiveness, or application for forgiveness, does not factor in here. This means that most taxpayers will have nondeductible expenses incurred in 2020 and nontaxable loan forgiveness income hitting in 2021. In the event that a taxpayer does not receive forgiveness for their full loan despite expecting to, the taxpayer will be able to amend the 2020 tax return to deduct the portion of expenses that were not forgiven, or simply deduct the expenses on the 2021 tax return.
The PPP program has seen a number of changes since its implementation back in April and there is the possibility this is not the last change. As it stands, the loan forgiveness application will be due 10 months after the end of the taxpayer's covered period, which is when payments are set to begin. However, the sooner the application is filed and reviewed, the sooner the loan forgiveness amount can be finalized and everything reconciled for book and tax purposes.