Jessica L. Jeane, J.D.
Director of Public Policy & Communications
November 18, 2020
Treasury and the IRS have released two pieces of guidance on the tax treatment of expenses paid for with a Paycheck Protection Program (PPP) loan.
Rev. Rul. 2020-27, released late in the evening on November 18, provides sub-regulatory guidance on whether a PPP loan participant who paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects the loan to be forgiven. Additionally, the revenue ruling provides guidance regarding PPP loan participants who have not applied for forgiveness in 2020 but intend to in the following taxable year.
The PPP, created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, (P.L. 116-136), provided forgivable loans to eligible small businesses, certain non-profit organizations, veteran’s organizations, Tribal business concerns, independent contractors, and self-employed individuals adversely impacted by the COVID-19 pandemic.
Generally, Treasury states that if a business reasonably believes a PPP loan will be forgiven, expenses related to the loan are not deductible, regardless of whether the business has yet filed for forgiveness. However, in the case where a PPP loan is expected to be forgiven in the future but is, in fact, not, applicable business expenses can be deducted.
“Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket,” Treasury said in a November 18 press release.
Wednesday night’s guidance drop not only reiterates Treasury and the IRS’s position taken in Notice 2020-32 against so-called “double-dipping," it further clarifies that regardless of when loan forgiveness is requested or granted, if forgiveness is reasonably expected, any covered expenses paid for with loan proceeds are not deductible.
Additionally, as noted above, Treasury and the IRS on November 18 released Rev. Proc. 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, to claim a deduction for certain otherwise deductible eligible payments. For those who decide to forego requesting loan forgiveness, the safe harbor also allows these taxpayer 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.
“Today’s guidance provides taxpayers with greater clarity and flexibility,” Treasury Secretary Steven Mnuchin said. “These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”
November 19 Update
Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., have criticized Treasury’s latest PPP guidance on deductibility as missing “the mark.”
“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving [PPP] loans to receive the benefit of their deductions for ordinary and necessary business expenses,” Grassley and Wyden said in a November 19 joint statement. “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.”
Grassley and Wyden went on to criticize Treasury’s choice to “double down” on its position, which ultimately increases the tax burden on small businesses. “Small businesses need help maintaining their cash flow, not more strains on it,” they said.
Additionally, the Senate’s top tax writers alluded to the possibility of addressing this issue in year-end legislation, but encouraged Treasury in the meantime to reconsider its position. Notably, Grassley and Wyden are both cosponsors of Sen. John Cornyn’s, R-Tex., bipartisan Small Business Expense Protection Act, (S. 3612), which would clarify congressional intent that ordinary business expenses paid with forgiven PPP loans are deductible.
NSA presents this information in the interest of its members for information purposes only and is not intended to provide, nor should it be relied upon, as legal, tax, or accounting advice.