PPP Loan Forgiveness Update: New Guidance on Deductibility of Expenses

Last Wednesday, the U.S. Treasury and IRS issued new guidance to clarify the tax deductibility of business expenses that are paid for with PPP loans. These expenses include payroll costs, certain employee health benefits, mortgage interest, rent, utilities and interest on other debt.

Revenue Ruling 2020-27 indicates that PPP loan recipients may not deduct these otherwise deductible expenses if the loan has been forgiven or is expected to be forgiven in future years.

Revenue Procedure 2020-51 provides guidance on how to treat expenses that were not initially deducted in a tax year if the PPP loan is ultimately not forgiven, or the taxpayer decides not to apply for forgiveness.

While the move was not entirely unexpected – back in May, the IRS said that while forgiveness of the loan would be tax-free, covered expenses would not be deductible – both Republican and Democratic lawmakers said it was their intention to allow borrowers to deduct eligible expenses and in fact proposed legislation to that would permit them to do so. That bill, the “Small Business Expense Protection Act of 2020”, was introduced in May and referred to the Senate Finance committee, where it remains.

Obviously, we hope the new guidance is not the last word on this issue. In the meantime, if you’ve received, or are pursuing, forgiveness of a PPP loan, we urge you to discuss the matter with your Weiss tax professional at your convenience.

For an in-depth look at the new guidance, read this report in Accounting Today.