IRS Disallows 2020 Expenses for PPP Loans Forgiven in 2021

As with much of what has been issued regarding PPP loans and ever-changing guidance, the following analysis of deductibility is subject to legislative change.  At the end of April, the IRS issued guidance precluding deductions for expenses paid with PPP funds.  The Small Business Expense Protection Act would reverse that and allow the expenses to be deducted, however, while still under consideration, this bill has not yet passed Congress.

A frequent question by borrowers is how to project 2020 taxable income if the business received a Payroll Protection Program (PPP) and the loan has not been forgiven by the end of 2020.  The IRS just issued additional guidance reaffirming their position on the non-deductibility of expenses and clarifying the tax treatment when the PPP loan has not been forgiven before December 31. The press release states “Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expense are not deductible.  This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.”

The new guidance says that if a business reasonably believes that a PPP loan will be forgiven, the expenses are not deductible.  When a borrower does not apply for forgiveness before the end of 2020, expenses paid with the PPP funds cannot be deducted in 2020 if the borrower reasonably believes the PPP loan will be forgiven in the future.  So no matter if the loan is forgiven in 2020 or 2021, the expenses paid with the PPP loan funds are not deductible in either year.

It the expenses are not forgiven either because the business does not apply for forgiveness or because the request is reduced or denied, the expenses can be deduction.  According to the guidance the expenses could be claimed on the 2020 tax return, an amended 2020 tax return, or the 2021 tax return (the subsequent taxable year).  Those who deduct expenses paid with PPP funds under this guidance must include a statement pursuant to Revenue Procedure 2020-51 with their tax return.

Reach out to our team at MWB for any questions you may have.