IRS Clarifies Stance On No Deductibility Of Expenses Paid With PPP Funds

On Wednesday, November 18th, the IRS released a Revenue Ruling and a Revenue Procedure which formalized its prior position in Notice 2020-32 that expenses funded with forgiven Paycheck Protection Program (“PPP”) loan funds are not deductible.

Simply put:

  • According to Revenue Ruling 2020-27 as long as the taxpayer can reasonably expect that the forgiveness will occur, the related expenses will not be deductible even if the taxpayer is on a cash basis and the reimbursement doesn’t occur until the following year.
  • The IRS also announced the issuance of Revenue Procedure 2020-51 which provides a safe harbor for certain PPP loan participants whose loan forgiveness has been partially or fully denied or who decide to forego requesting loan forgiveness. Additionally, for taxpayers that decide to forego requesting loan forgiveness, the safe harbor also allows these taxpayers to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return, as applicable, for the taxable year in which the taxpayer decides to forego requesting forgiveness.

The full ruling and procedure can be found here:

WHAT DOES THIS MEAN FOR ME?

Based upon these rulings, taxpayers should remember that in the eyes of the IRS, the practice of double-dipping by taking deductions for business expenses paid with forgiven PPP loan proceeds, violates federal tax law.

However, like most PPP guidance, the new clarification creates more questions. This guidance does not address the order in which the eligible expenses (payroll, rent, utilities, and mortgage interest) lose the ability to be deducted. Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:

  • Qualified business income deduction (Section 199A);
  • Research and development credits; and
  • Interest deduction limitation (Section 163(j)).

This still remains a contentious matter and professional associations continue to lobby to reverse this ruling. Moreover, several leading members of Congress disagree with the IRS position and say it doesn’t follow the intent of the Cares Act provision.

The leaders of the Senate Finance Commitee, Chuck Grassley, R-Iowa and Ron Wyden, D-Oregon, released in a joint statement:

“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”

Therefore, KatzAbsoch will continue to monitor the situation.

HOW KATZABOSCH CAN HELP

It is prudent for all taxpayers who are seeking PPP loan forgiveness to understand whether or not, and when, they can deduct expenses incurred with the loan proceeds and the tax impact that may arise from the lack of deductibility if the loan is forgiven.

KatzAbosch helps businesses through the process by providing consulting and guidance for Paycheck Protection Plan (PPP) funds. If you have questions about your situation, please reach out to your KatzAbosch representative or contact us.

Related Resources

News, Tips & Insights Sign-Up to Receive Updates

Enter your email address to subscribe to our digest of accounting and firm news.

  • This field is for validation purposes and should be left unchanged.