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 for with 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.
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 taxpayers to deduct the expenses paid for with PPP loans even if the loans are forgiven. Such legislation would need to be passed by Dec. 11.
If Grassley and Wyden are unable to get this legislation passed by Dec. 11, there is a contingent in Washington that believes a law could be passed in the first quarter of 2021 allowing the expenses to be deductible.