Deductibility of PPP Fund Expenditures

On November 18, 2020, the IRS issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51. This guidance confirms the position of Internal Revenue Service and the Treasury Department that denies a deduction for expenses paid with PPP loan proceeds if the borrower has a reasonable expectation of loan forgiveness as of the end of the taxable year (regardless of whether the application for forgiveness is made before the end of the year).

The holding of Revenue Ruling 2020-27 reads as follows: “A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not 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 to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”

Revenue Procedure 2020-51 provides safe harbor procedures for borrowers who ultimately opt to not apply for forgiveness, or whose forgiveness application is denied in a subsequent year.

Without further legislative action, borrowers under the PPP program will need to evaluate, as of their tax reporting year end, whether they “reasonably expect to receive forgiveness of the covered loan.” If the answer is yes, expenses paid with PPP loan funds will not be deductible for tax reporting purposes. While we believe the CARES Act did not intend for these expenditures to be disallowed for federal tax reporting purposes, and it appears there is bipartisan support in both houses to correct this apparent oversight, there remains significant uncertainty as to when, or if, any corrective legislation action will occur.

Please call your MSL tax advisor if you would like to discuss what this means to you.