IRS Guidance on Deducting Expenses paid with PPP Loan Proceeds
Posted on 12/21/2020 at 10:54 AM by Ronald Mountsier
UPDATE – ON DECEMBER 21, 2020 CONGRESS ANNOUNCED A NEW STIMULUS PACKAGE THAT WILL ALLOW EXPENSES PAID WITH THE PROCEEDS OF A PPP LOAN TO BE DEDUCTED IN FULL.
During the week of November 20, the IRS issued two rulings, Revenue Ruling 2020-27 and Revenue Procedure 2020-51 providing guidance to taxpayers who have received Paycheck Protection Program (PPP) loans.
Although the forgiveness of a PPP Loan is not taxable, expenses paid with the proceeds of a forgiven loan are not deductible. The discussion below assumes that the taxpayers report income on a calendar year basis. Fiscal year taxpayers would apply the same rules, but the dates would change.
Revenue Ruling 2020-27 makes it clear that taxpayers who received a PPP loan in 2020 cannot deduct expenses paid with the proceeds of that loan if at the end of 2020 the taxpayer reasonably expects to receive forgiveness of the loan, even if the taxpayer has not applied for forgiveness by December 31, 2020. Basically this means that you treat the loan as forgiven if, in fact, you reasonably expect it to be forgiven.
Revenue Procedure 2020-51 then provides guidance on what the taxpayer must do to claim those deductions if it is later determined that the PPP loan will not be forgiven. In that case, the taxpayer has two options – it can claim the expense deductions on the 2020 tax return when filed, or on an amended 2020 return, or the taxpayer can claim the deductions on the return filed for the year in which it is determined that the loan will not be forgiven.
In practice, the two rulings work together as follows:
- A taxpayer who reasonably expects the PPP loan to be forgiven as of the end of 2020 would not deduct expenses paid with the PPP loan proceed on the 2020 return – unless prior to filing that return it is determined that the PPP loan will not be forgiven, in which case the expenses could be claimed on that original return.
- If the return has already been filed, the taxpayer has the option of claiming those expense on an amended 2020 return, or alternatively the taxpayer can claim the expenses on the tax return for the year in which it is determined that forgiveness is denied (or the taxpayer decides not to seek forgiveness), most likely the 2021 tax year return.
Please reach out to Dickinson Law if you need additional guidance in regard to your PPP loan.
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