IRS Clarifies Deductibility and Timing of PPP Funded Expenses

On November 25, 2020, the IRS released a revenue ruling clarifying its stance on the Paycheck Protection Program (PPP) loan forgiveness and the deductibility of the related expenses.

While the Coronavirus Aid, Relief, and Economic Security (CARES) Act itself does not address whether the deductibility of expenses is allowed if the PPP loan is subsequently forgiven, many believe the IRS’s revenue ruling is contrary to Congress’s intent when the CARES Act was passed.

When the PPP loan program began, it was thought to provide businesses a forgivable loan that would not be considered taxable income, allowing businesses to continue operations during the COVID-19 pandemic. A hint of the IRS’s position came out in May 2020 when they issued a notice informing taxpayers that tax deductions would not be allowed for expenses that supported forgiveness of the PPP loan. While not directly taxing forgiven PPP loans, the IRS is essentially increasing taxable income by not allowing the related deductions, such as payroll and occupancy costs. The IRS was silent however as to the timing and uncertainty related to the loan forgiveness, and the timing of the deductibility of the expenses.

In the new revenue ruling, the IRS confirmed its position that expenses paid for with PPP loans are not deductible, and indicated that if there is a “reasonable expectation” that the PPP loan will be forgiven, even if not formally forgiven before December 31, 2020, then the expenses related to the loan should not be deducted in 2020. Therefore, PPP loan recipients will most likely have higher 2020 taxable income, and therefore owe more tax, than was originally planned. The IRS has provided a safe harbor allowing the deductibility of the expenses in 2020 if PPP loan forgiveness is denied, in whole or in part, or if a decision is made not to request PPP loan forgiveness. Use of the safe harbor requires certain disclosures to be made in the income tax return.

Please contact ECS Financial Services before the end of the year if you would like our tax planning assistance in light of this clarified IRS revenue ruling.

About the Author - Jan Forgue is a senior manager in the assurance group. In addition to planning and managing client attest engagements, she performs firm quality control responsibilities including engagement quality control reviews, coordination of annual monitoring and inspection procedures, update of the firm's quality control policies and practice aids, and provides assistance with complex accounting issues. She assists in the expansion of the firm's attest practice, including peer review and accounting and attest consulting services. She is considered a subject matter expert in the employee benefit plan area. She also assists in developing staff through leading in-house training and identifying external CPE opportunities, on-the-job-training, and technical research skills.