PPP Expense Deductibility and Timing Clarified in New Guidance

PPP Expense Deductibility and Timing Clarified in New Guidance

Written by Tax Manager Dan Chodan, CPA

The Treasury Department and Internal Revenue Service have released guidance clarifying the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received. If a business reasonably expects that a PPP loan will be forgiven, expenses related to the loan are not deductible in the year paid or incurred whether the business has filed for forgiveness or not. 

Revenue Ruling 2020-27 gives two examples to illustrate common situations for taxpayers. In situation 1, the PPP borrower applied for loan forgiveness before its year end after spending the funds on eligible expenses. In situation 2, the PPP borrower expects to apply for forgiveness in the next year but still satisfied the PPP loan requirements of paying eligible expenses during the covered period. In both situations, the borrower has a reasonable expectation of forgiveness due to spending the funds on eligible expenses. As a result, the borrower may not deduct expenses in either situation.

Revenue Procedure 2020-51 provides a safe harbor for borrowers to deduct expenses related to PPP loans if forgiveness will never be sought or if forgiveness is denied in whole or in part. If forgiveness is denied, expenses are deductible either on the original, amended, or subsequent tax return. 

Borrowers are encouraged to consult their tax professional to plan for the tax impacts of this notice. While many have hoped for Congressional action to restore the tax-free intent of the PPP, it is unclear whether any relief will be passed.

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