November 19, 2020
The IRS issued a highly anticipated (and much needed) ruling today regarding the tax treatment of PPP loan forgiveness and the related expenses covered by those loans. According to the IRS (Revenue Ruling 2020-27), taxpayers that received PPP loans and incurred expenses necessary to achieve reasonably expected loan forgiveness “may not deduct those expenses in the taxable year in which the expenses were paid or incurred… even if the taxpayer has not submitted an application to forgiveness of the covered loan by the end of such taxable year.”
Here’s an example:
A taxpayer receives $1 million in PPP loan proceeds on May 1, 2020. Over the next 24 weeks, the taxpayer incurs eligible payroll costs of $1.4 million, more than the amount of the loan proceeds. The taxpayer expects to receive total forgiveness of the $1 million PPP loan.
According to the IRS, payroll costs covered by the PPP loan proceeds are not deductible. Therefore, the taxpayer is required to reduce its 2020 payroll deduction by the amount of the loan to be forgiven ($1 million) whether or not the SBA has granted the loan forgiveness by the end of the year. Furthermore, even if the taxpayer waits until 2021 to submit its forgiveness application, the deduction is still reduced in 2020.
Congress may still weigh into this by enacting a new law that specifically allows full tax-deductibility of the expenses covered by the PPP loans. There is plenty of chatter to that effect in Washington, but don’t hold your breath. It’s currently held up in the COVID-relief stalemate between the House and the Senate.
For now, this is all we have. Count on us to keep you posted and to do the important research so you don't have to. If you have any questions about this article, reach out to Marty Fox at firstname.lastname@example.org.