On November 19, 2020, the IRS released Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which provide further guidance on the deductibility of expenses paid for with loans guaranteed under the Paycheck Protection Program (PPP).
The CARES Act established the PPP to help small businesses pay payroll costs and other eligible expenses during the COVID-19 emergency. Loan recipients can have their loans forgiven up to an amount equal to certain payroll, mortgage or rent, and utility expenses incurred between February 15, 2020 and December 31, 2020. The CARES Act excludes the amount of any such loan forgiveness from the borrower’s taxable income.
Although the CARES Act makes PPP loan forgiveness tax-free, it does not indicate whether otherwise deductible expenses paid with PPP loan proceeds are still deductible.
In May, the IRS issued Notice 2020-32, which provides that expenses are not deductible to the extent that the payment of the expenses results in PPP loan forgiveness.
Revenue Ruling 2020-27 clarifies that a taxpayer may not deduct otherwise deductible expenses paid with PPP loan proceeds if the taxpayer reasonably expects the loan to be forgiven, even if the taxpayer has not applied for forgiveness by the end of the 2020 taxable year.
Revenue Procedure 2020-51, issued simultaneously with Revenue Ruling 2020-27, provides a safe harbor that allows a taxpayer to deduct expenses incurred in 2020 if the taxpayer’s application for forgiveness ultimately is denied or the taxpayer decides not to seek forgiveness. Taxpayers may deduct the eligible expenses either (1) in the 2020 taxable year or (2) in the year in which forgiveness is denied or the taxpayer decides not to seek forgiveness.