On Nov. 18, 2020, the Internal Revenue Service released additional guidance regarding the deductibility of expenses paid using proceeds from a PPP loan.
The new guidance states that if a taxpayer received a PPP loan and paid or incurred usually deductible expenses with the loan proceeds, those expenses are not deductible if the taxpayer has a reasonable expectation that they will receive forgiveness. The expenses paid using PPP loan proceeds are not deductible in the year paid even if forgiveness has not been achieved or applied for by the end of the taxable year. In other words, the expenses are not deductible on taxpayers’ income tax returns that include the covered period. The covered period is either the 8- or 24-week period you elected to spend the loan proceeds.
Separately, the Internal Revenue Service has provided a safe harbor allowing a deduction for expenses paid using PPP loan proceeds if a taxpayer’s request for loan forgiveness is denied in whole or in part, or if loan forgiveness will not be requested. If one of these criteria is met, the eligible expenses may be deducted on the taxpayer’s timely filed (including extensions) original or amended income tax return for the 2020 tax year, an amended income tax return for the 2020 tax year, or the original tax return for the 2021 tax year. To apply the safe harbor a statement must be attached to the tax return on which the expenses are deducted.
It is still possible that Congress will pass legislation reversing the IRS’s decision. Senate Finance Chairman Republican Chuck Grassley and Democrat Ron Wyden are quoted as saying “Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close.”
Grassley and Wyden said they are working on language that could be included in government spending legislation that would allow the expenses to be deductible even if the loans are forgiven.
*Please note that information and guidance on the PPP loan program is changing on a daily basis. The information provided in this article is current as of 12/2/20. It is intended for general informational purposes only. Consult with your financial advisor about your specific situation.