There has been a lot of confusion and discussion about what is, and is not, deductible when it comes to Paycheck Protection Program (PPP) loan funds. While it was clear that loans that are forgiven would not be considered taxable income, there was still the question of whether expenses paid with a forgiven PPP loan would be deductible as well. Various members of the House and Senate publicly stated that it was their intention to allow expenses to be deductible, but the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is not written clearly on this point.
Back in April, an IRS notice indicated that expenditures paid via PPP loan proceeds would not be deductible. In theory, “Notices” are not considered the final word, but guidance that will be confirmed in the future. At the same time, there were several bills introduced in both the Senate and House to clear up the intent of the CARES Act on this issue and allow for deductibility, but unfortunately none of them were brought to the floor for a vote.
On November 18, the IRS released a Revenue Ruling and Revenue Procedure to clear up any confusion on this topic prior to tax season. The Ruling says that if a business received a PPP loan, and paid for typically deductible expenses with that loan, those expenses are not deductible if the business expects to receive loan forgiveness – regardless of whether they have applied for forgiveness by the end of the year.
The Procedure provides protection for those that expect forgiveness and don’t receive it or decide not to apply for it. In this case, they can go back and amend their return to deduct expenses that did not qualify because of the ruling described above.
This action by the IRS could still spur Congress to act on one of the bills that never made it to the floor, but it is doubtful this will happen before inauguration day. With this in mind, we suggest you plan to not expect to deduct expenses paid for with PPP loan funds. However, where possible, you may also want to wait to file for forgiveness until you have to as well, since Congress still may act on this controversial topic.
If you have questions, or need guidance for your particular situation, don’t hesitate to reach out. While things are still a bit murky, we can help you plan for multiple scenarios and will do our best to keep you informed as new information becomes available.