Deductibility of Expenses Paid with PPP Funds

An early Happy Thanksgiving to all this week! Today’s commentary is not part of our regular bi-weekly publications, but rather a response to the recently issued guidance issued by the IRS regarding the PPP loan program.

Deductibility of Expenses Paid with PPP Funds

For months, we have been waiting on guidance regarding the deductibility of expenses that were paid with PPP loan proceeds.  Revenue Ruling 2020-27 issued last week offers some clarity, but some questions remain unanswered. In short, the IRS has taken the position that if the taxpayer reasonably believes that the loan will be forgiven, the related expenses are not deductible. 

Two examples are given in the Revenue Ruling.

  • In the first example, the taxpayer submits the application for forgiveness, but is not informed on whether the loan will be forgiven by the end of 2020. 
  • In the second example, the taxpayer satisfies all the requirements for forgiveness but does not submit the application by the end of 2020.
In both examples, the IRS takes the position that the expenses are not deductible in 2020, since the taxpayer reasonably expects the loan to be forgiven. The Revenue Ruling also indicates that if the amount of actual loan forgiveness is different than what the taxpayer anticipated, the taxpayer would have the ability to either amend the 2020 tax return or deduct expenses in the year of forgiveness. 

The IRS did however provide guidance regarding a safe-harbor for allowing a taxpayer to deduct these expenses. Three criteria must be met.
  • The expenses must be paid or incurred during the 2020 tax year,
  • The taxpayer expects the loan to be forgiven in a year after 2020, and
  • In that subsequent tax year, the request for forgiveness is denied or the request is never made.

As we mention above, the Revenue Ruling leaves us with unanswered questions. For instance, if a portion of the loan is forgiven, which expenses are deductible vs. non-deductible? Is the expense disallowance pro-rata?  Is the expense disallowance at the taxpayer’s discretion? The disallowance could impact other aspects of the taxpayer’s return, like the calculation of the 199A deduction.  The guidance is also silent on issues involving self-employed taxpayers and taxpayers with fiscal year ends. While this continues to be a frustrating area for tax practitioners and taxpayers in general, we will continue to look for additional guidance.

Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.

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