23 Nov 2020 Deductibility of PPP Loan Expenses
IRS Guidance on Deductibility of PPP Loan Expenses
The IRS recently issued Revenue Ruling 2020-27 that states that expenses paid using PPP funds are not deductible in 2020 if there is a reasonable expectation at the end of the taxable year that the PPP loan will qualify for loan forgiveness.
Prior to the issuance of Revenue Ruling 2020-27, the thought was that a taxpayer could deduct covered expenses in 2020 if the PPP loan was not forgiven until the following year. However, the ruling specifically states that it does not matter if a borrower has applied for forgiveness or not; the expenses are not deductible in 2020 if as of the end of the taxable year, there is a reasonable expectation that the PPP loan will be forgiven.
Only the amount of the loan that is forgiven results in nondeductible expenses. If a borrower has partial loan forgiveness, only the expenses used for the part that is forgiven are nondeductible.
Other items to consider
There is still guidance that has not been given on how to allocate nondeductible expenses such as wages, employee benefits, rent, utilities, and interest. The allocation of wages could be important for those with a research and development credit or who receive a qualified business income deduction. The rules regarding PPP loans have changed many times since the beginning of the CARES Act. It is wise to remain patient and not to make final decisions until tax deadlines are compelling, or final guidance is given.
When the IRS first indicated in June 2020 that the expenses paid by PPP loan funds would not be deductible there were members of Congress from both parties that indicated that was not the intent of Congress and that they would pass legislation to overrule the IRS. This has not happened as of November 2020. There is a chance it can still be passed, but until it occurs it is best to follow the IRS guidelines.