In late November, the Internal Revenue Service (IRS) issued a Revenue Ruling and a Revenue Procedure to clarify the Paycheck Protection Program (PPP) loan forgiveness and deductible expenses. These are expansions on Notice 2020-32 released by the IRS in April that indicated that for Federal income tax purposes of PPP loan expenses, deductions would be disallowed on the 2020 return, even if the forgiveness occurs in 2021.

Most notably, Revenue Ruling 2020-27 confirms taxpayers that received a covered loan may not deduct expenses paid with proceeds of PPP loans in the taxable year in which the expenses were paid or incurred if such loans are expected to be forgiven. This ruling is true even if the taxpayer has not yet submitted a forgiveness application by the end of the taxable year and even if the forgiveness is not granted until 2021.

The corresponding Revenue Procedure 2020-51 helps outline steps for when:

  • Eligible PPP loan expenses are paid or incurred during the 2020 taxable year
  • A PPP loan is expected to be forgiven in the following taxable year or part or
  • All of a PPP loan is not forgiven, or forgiveness is not requested

This ruling clarifies that in circumstances where part or all of a PPP loan is not forgiven, taxpayers may claim deductions for amounts paid using PPP loan proceeds. It provides safe harbors for taxpayers who are denied forgiveness with the allowance of deduction of expenses in 2020 or the subsequent taxable year.

These rulings provide much-needed information as businesses file end of year tax paperwork, though many questions surrounding the PPP loan still remain. Please contact us today if you have any further questions about your specific PPP circumstances – info@ssfllp.com or (925) 271-8700.