The IRS previously issued guidance indicating that expenses used to qualify for a PPP loan that is forgiven are not deductible. Recently, the IRS and the Treasury Department have issued guidance in Revenue Ruling 2020-27 regarding the tax treatment of these expenses if the taxpayer’s PPP loan hasn’t been forgiven by the end of the tax year. The guidance indicates that if the taxpayer reasonably expects to receive forgiveness of the loan on the basis of the expenses paid or accrued during the Covered Period, those expenses may not be deducted, even if the taxpayer’s loan has not been forgiven, and even if the taxpayer has not submitted an application for forgiveness.
When the loan is ultimately forgiven, the forgiveness of debt income is not taxable. So, ultimately there is neither a tax benefit, nor a tax harm. However, application of this guidance results in the tax resulting from the nondeductible expenses being potentially allocated to the year the expenses are paid or incurred, rather than a later year when the loan is forgiven.
If you have questions about how this clarification affects your business, or if we can assist with any other loan forgiveness questions or issues, please do not hesitate to contact us.
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Russell Thompson Butler & Houston, LLP