COVID-19 Resource Center

November 24, 2020

IRS Shuts Down Hopes of Tax Deductibility of PPP Funded Expenses

This week, the IRS doubled-down on its position that a taxpayer who receives a loan through the Paycheck Protection Program cannot deduct expenses that are normally deductible under the Code to the extent the payment of those expenses results in loan forgiveness under the CARES Act.

Initial IRS Guidance on Taxable Expenses Covered by PPP

In May, the IRS issued Notice 2020-32 denying deductions for expenses that are normally fully deductible suggesting that such a deduction would be “double-dipping.” Congress quickly moved to reverse the IRS in the Small Business Expense Protection Act (S.3162) but that bill languished and still has not passed.  

The question then arose—what happens if you pay and write off PPP-forgivable expenses in 2020 and don’t apply for or receive loan forgiveness until 2021.   

Latest IRS Guidance on Taxable Expenses Covered by PPP

On Wednesday, November 18, relying on past judicial precedent, the IRS published Revenue Ruling 2020-27 stating that expenses paid with forgivable PPP loans are not deductible if, at the time of filing the return for the year, the expenses would ordinarily be deducted. According to the ruling, if a taxpayer “reasonably expects” to have its PPP loan forgiven, expenses paid with the loan are not deductible on the taxpayers’ 2020 returns, even if forgiveness is not achieved until 2021.     

Congress Reaction to IRS Ruling

Congress reacted quickly in blasting the IRS for Wednesday’s ruling. In a joint statement issued the next day, Senate Finance Chairman Chuck Grassley and Democrat Ron Wyden claimed the Treasury is depriving small businesses of much-needed economic relief by forcing them to choose between getting their PPP loans forgiven or claiming write-offs on expenses they covered with the loan money.      

The Paycheck Protection Program has been the centerpiece of the CARES Act. As COVID cases resurge, capacity cuts and closures are being reconsidered across the country. It is expected that another round of PPP funding will be allocated in the near future. 

Considering the ongoing pandemic and quick backlash, there’s still a chance that Congress could come up with legislation that allows the deductibility of forgiven expenses.

We are happy to discuss how this may impact your Accounting, Bookkeeping, and/or Business Tax Planning.

 

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