On Wednesday, November 18, 2020, the U.S. Treasury Department and IRS issued, in a press release, additional guidance that clarifies the deductibility of expenses where a business received a Paycheck Protection Program (PPP) loan.    

Per the newly issued revenue ruling (Rev. Rul. 2020-27), if a taxpayer reasonably expects their application for forgiveness of their PPP loan to be approved,  then their otherwise deductible expenses that were paid for with the PPP loan proceeds are not deductible in the year in which these expenses were incurred. This is regardless of if the loan is forgiven in a different year from which the expenses were incurred and paid. 

The Treasury and IRS explain their rationale by noting that as the proceeds of a forgiven PPP loan are not taxed, the associated expenses should not be deductible. This “results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.”  (IRC Regulations 1.265-1) 

For those taxpayers who are unsure as to whether their PPP loans will be forgiven, whether entirely or partially, the newly issued revenue procedure (Rev. Proc. 2020-51) provides guidance on safe harbors. Expenses that were paid with PPP loan proceeds that are ultimately not forgiven, will be considered deductible up to the amount of the loan not forgiven. 

As we have been doing with all coronavirus legislation and IRS and SBA guidance during these past several months, we will be sure to update you with any additional insight as soon as possible. Continue to check back here for the most up to date tax information and changes in response to coronavirus. If you have questions about this or related topics contact an MCB Advisor at 703-218-3600 or click here. 

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