IRS Clarifies Position on Timing of Non-Deductibility of PPP Related Expenses

On April 30, 2020, the IRS issued guidance in Notice 2020-32 regarding the deductibility of expenses relating to the Paycheck Protection Program (PPP) loans.  The IRS made it clear that no deduction is allowed for an otherwise deductible expense if the payment of the expenditure results in forgiveness of the related PPP loan. It was unclear when the expenses would be rendered non-deductible.

On November 18, 2020, the IRS issued Rev. Rul. 2020-27 addressing the timing of the non-deductible expenses for a taxpayer that received a PPP loan, who reasonably expects that loan to be forgiven in the subsequent tax year.  The IRS ruled that a taxpayer who received a PPP loan and paid or incurred certain otherwise deductible expenses might not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of the taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan based on those expenses. Under this guidance, most calendar year taxpayers will be denied the deductibility of the PPP Loan related expenses in 2020. This rule applies even if the taxpayer has not yet applied for forgiveness.

On November 18, the IRS also issued safe-harbor rules in Rev. Proc. 2020-51 that allow a taxpayer to take the deductions in the current tax year if the PPP loan that is expected to be forgiven is denied in the subsequent year.   This procedure would be accomplished by deducting the expenses allocable to the PPP loan forgiveness on the original tax return or by filing an amended return.

Tax planning and projections should be prepared, incorporating the non-deductible expenses to minimize any avoidable tax impact. Your trusted Smolin tax professional can assist you in navigating your year-end tax planning strategies.

By Tom Cole, CPA & Member of the Firm

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