On November 18, the U.S. Treasury Department and IRS issued guidance reinforcing their position on the tax treatment of expenses related to Paycheck Protection Program (PPP) loans, as well as providing guidance on situations resulting from the likely scenario of not obtaining PPP loan forgiveness prior to year-end. According to Revenue Ruling 2020-27, taxpayers are not allowed to deduct expenses paid with proceeds of PPP loans if such loans are expected to be forgiven. This reaffirms the position of the IRS in Notice 2020-32. The ruling reasons that because the taxpayer reasonably expects reimbursement of the expenses through the forgiveness of the PPP loan, the deduction of such expenses is not appropriate. In the alternative, the ruling concludes that the deductions are disallowed under section 265(a)(1), which generally prohibits deductions for amounts allocable to wholly exempt income.
The ruling illustrates multiple taxpayer scenarios, concluding that if the PPP loan has not been forgiven by the end of 2020, but the taxpayer reasonably believes the PPP loan will be forgiven, that the expenses are not deductible. This applies whether or not the taxpayer has filed for forgiveness by the end of 2020.
Revenue Procedure 2020-51 provides a safe harbor for a taxpayer claiming deductions for expenses paid with PPP loan proceeds in certain situations concerning denial of forgiveness and decisions not to request forgiveness.
We note that there are significant criticism and valid arguments against the Treasury’s position on the deductibility of expenses funded by PPP loan proceeds; however, it may require congressional action to change the position. As such, it is unclear whether any reversal will occur before the end of the year or prior to filing 2020 tax returns. We will continue to monitor this developing issue. Meanwhile, if you have any questions on the program or the new regulations, please contact Bradley Wooldridge or your Manning Fulton relationship attorney.