IRS Issues Guidance for Tax Treatment of PPP Loans

The IRS recently issued guidance relating to the tax treatment of Paycheck Protection Program (PPP) loan forgiveness.

Revenue Ruling Addresses Deductibility of PPP-funded Expenses:  In a recent revenue ruling, the IRS presented two situations in which a taxpayer used funds from a PPP loan to pay eligible expenses. In the first situation, the taxpayer applied for forgiveness of the loan in November 2020, but did not receive a decision from the lender before the end of 2020. In the second situation, the taxpayer did not apply for forgiveness of the loan before the end of 2020, but expects to in 2021. Both taxpayers satisfied all requirements under the CARES Act for forgiveness of the loans. The IRS ruled that a PPP loan recipient that paid or incurred certain otherwise deductible expenses may not deduct those expenses in the tax year in which they were paid or incurred if, at the end of such tax year, the taxpayer reasonably expects to receive forgiveness of the covered loans, even if the taxpayer has not submitted an application for forgiveness of the loan by the end of such tax year.

Safe Harbor for Certain PPP Loan Participants:  The IRS has issued a safe harbor allowing a taxpayer to claim a deduction in 2020 for certain otherwise deductible eligible expenses if (1) the expenses are paid or incurred during the taxpayer’s 2020 tax year; (2) the taxpayer receives a Paycheck Protection Program (PPP) loan, which the taxpayer expects to be forgiven in a tax year after 2020; and (3) in a subsequent tax year, the taxpayer’s request for forgiveness of the loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the loan. Some or all of the eligible expenses may be deducted on (1) the taxpayer’s timely-filed (including extensions) return for 2020; (2) an amended return or an Administrative Adjustment Request (AAR) for 2020; or (3) the taxpayer’s timely-filed (including extensions) return for the subsequent tax year.

 

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