IRS Clarifies Rules Surrounding PPP Forgiveness

On November 18, the IRS published long-awaited guidance regarding PPP forgiveness and the deductibility of expenses paid with PPP loan proceeds. For most taxpayers, this means that expenses paid with PPP funds will be nondeductible on their 2020 income tax returns.

As prescribed earlier in the year through the CARES Act, the forgiveness of PPP loan proceeds is considered non-taxable. However, the IRS subsequently released guidance that any qualified expenses (i.e. compensation, rents, utilities) paid with PPP loan proceeds are non-deductible.

To date, no changes have been made to the above rules either by the IRS or Congress. However, many questions remained on when the disallowance of the deductions paid with PPP loan proceeds would be in effect. Through the recent guidance issued by the IRS( Rev. Rul. 2020-27 and Rev. Proc. 2020-51), if a taxpayer has a “reasonable expectation” their PPP loan will be forgiven, the expenses will be disallowed in the year the expenses are paid or incurred. For most taxpayers, this will be the 2020 tax year. A taxpayer would have a “reasonable expectation” of loan forgiveness if they have met all the conditions for the forgiveness of the loan. These rules would apply regardless of if the taxpayer has received formal forgiveness of the loan through their lender or applied for loan forgiveness.

The IRS has provided a safe harbor to taxpayers to allow for a deduction of expenses paid with PPP loan proceeds if the SBA subsequently disallows forgiveness of the loan or the taxpayer decides not to pursue loan forgiveness. If the taxpayer has already filed a 2020 tax return and the expenses had not been deducted, the taxpayer may correct the deduction of the expenditures through an amended return filing or deducting the expenses in a subsequent year (i.e. 2021).

If you would like more information on the full impacts of the implications of PPP forgiveness and how to plan accordingly, contact Ryan Kilpatrick at 513-858-6040