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IRS Issues Guidance on Deductibility of Expenses Incurred from PPP Proceeds

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There has been great speculation on how to treat the expenses paid by a business that received Paycheck Protection Program (PPP) funds since the IRS had indicated that those expenses would not be deductible for tax purposes. The issue at hand was the timing of the non-deduction. Specifically, the question is: are the expenses deductible in the year paid, or the year when the loan is forgiven?

The U.S. Treasury has now issued Revenue Ruling 2020-27, which indicates that even if a taxpayer has not had his/her loan forgiven, the expenses will not be deductible if the taxpayer reasonably believes that the loan will be forgiven. This will be the case whether or not the taxpayer has submitted the application for forgiveness before the end of the year.
The Treasury also issued Revenue Procedure 2020-51, which provides a safe harbor for taxpayers who did not deduct expenses from PPP loans and later learned that they were not entitled to full forgiveness. The taxpayer may deduct those expenses on the return for the year if the return is on extension. If they already filed, they may amend the return for the year in which no deduction was taken. Alternatively, the Revenue Procedure indicates that the taxpayer may choose to deduct those expenses in the year that the loan forgiveness is denied.
Section Four of the Revenue Procedure sets forth statements and procedures that are required to be submitted for the safe harbor to be valid. Of most significance are the following: information on the date of the disbursement of the loan, the amount of the covered loan forgiveness that was denied, the date of denial, and the amount of eligible expenses and non-deducted eligible expenses that are reported on the return.
It is important to note that the IRS is very clear that “nothing in this Revenue Procedure precludes the IRS from examining other issues relating to the claimed deductions for non-deducted eligible expenses, including the amount of the deduction and whether the taxpayer has substantiated the deduction claim. It also does not preclude the IRS from requesting additional information or documentation verifying any amounts described in the statement described in section 4.04 of this revenue procedure.”