In the PPP section of yesterday’s year-end tax planning alert, we mentioned that the IRS was expected to release direction soon on whether the PPP loan amount forgiven will be taxable in 2020 vs.21. Well, we didn’t expect it to be so soon, but the guidance has just been released.
The guidance from the U.S. Treasury Department and Internal Revenue Service (IRS) clarifies the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received.
The IRS has confirmed that taxpayers with a reasonable expectation of PPP loan forgiveness may not deduct expenses paid with those funds, even if the forgiveness has not been granted prior to the end of the taxable year. (Rev. Rul. 2020-27).
So, it does not matter if your loan is forgiven in 2020 or 2021. You will not be able to deduct 2020 expense deductions paid for by a PPP loan that was forgiven in 2020 or will be forgiven in 2021.
The IRS guidance states that because taxpayers calculate their forgiveness based on eligible expenses paid with PPP funds, the forgiveness of the loan amounts used for those expenses is reasonably expected to occur, and under IRC §265 taking the deductions would be inappropriate.
The IRS supplemented this guidance by stating that taxpayers who do not apply for forgiveness, or whose forgiveness requests are reduced or denied, may take deductions for expenses paid with the amounts that are not forgiven. (Rev. Proc. 2020-51)
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