Loan proceeds from Paycheck Protection Program (PPP) Loans granted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act are not taxable as income. However, expenses paid from PPP loan proceeds may not be deductible if the PPP loan is forgiven under the program. To determine whether expenses are deductible in calculating taxable income, it is helpful to turn to materials provided from the IRS since the CARES Act was passed.
Taxpayers and their advisors were quick to request guidance from the Internal Revenue Service (IRS) related to the deductibility of expenses after the CARES Act went into effect. To provide insight into their position, the IRS issued Notice 2020-32 in April 2020, stating a deduction will not be allowed for expenses paid with forgiven PPP loan proceeds. Specifically, this notice clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan received under the CARES Act, and the income associated with the forgiveness is excluded from income.
Taxpayers requested further guidance on the deductibility of expenses if a PPP loan has not yet been forgiven. In response to these requests, the IRS issued Revenue Ruling 2020-27 in November 2020. This ruling explains that expenses paid for with PPP loan proceeds are not deductible if the taxpayer reasonably expects to receive loan forgiveness. In both cases, whether the loan has been forgiven, or the taxpayer reasonably expects the loan to be forgiven, expenses are not deductible.
Finally, the IRS issued Revenue Procedure 2020-51 in November 2020, which provides guidance in situations where loan forgiveness has been denied, or if the taxpayer has voluntarily withdrawn their request for loan forgiveness. In these cases, the deduction for the expense may be allowed. Careful attention to the requirements found in Revenue Procedure 2020-51 should be made to allow for the deduction.
Currently, there are several parallel legislative efforts to clarify Congressional intent to allow for deductions for forgiven loan amounts. The proposal to allow PPP deductions was also included in the $908 billion bipartisan package rolled out last week. If there is a COVID relief package before the end of the year, it is likely that the PPP deductibility fix will be among the first tax items included, particularly given its bipartisan support from tax-writing committee leadership and expected minimal revenue impact. We will keep you updated with any new developments as they come up.
Should you have any general questions on the above, contact Eric Braendel with ABA at 202-218-7226, or firstname.lastname@example.org.