Note from the Editor: as expected, the IRS released the following statement, along with Rev. Rul. 2020-27 regarding the forgiveness of the PPP loan funds and the deductibility of the business expenses paid with the PPP loan. The business is expected to treat the expenses as non-deductible, whether they have applied for loan forgiveness or not, if they expect the loan proceeds to be forgiven. The next step is up to Congress to fulfill the expectation they had when the CARES Act was passed that the expenses would be fully deductible regardless of which funds were used to pay them.
The U.S. Treasury Department and Internal Revenue Service (IRS) released guidance this week clarifying the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received. Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax beneﬁt nor tax harm since the taxpayer has not paid anything out of pocket (note from the Editor – not entirely true as now the business may have a tax liability as a result of the reduction in allowable business expenses).
If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has ﬁled for forgiveness or not. Therefore, we encourage businesses to ﬁle for forgiveness as soon as possible.
In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.
“Today’s guidance provides taxpayers with greater clarity and ﬂexibility,” said Secretary Steven T. Mnuchin. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to ﬁle for loan forgiveness as quickly as possible.”