Craig Swindlehurst CPA, Tax Manager at Larson & Company, specializes in tax planning and preparation for individuals, small businesses, and captive insurance companies.

On Wednesday the IRS issued guidance related to Paycheck Protection Program (PPP) loans, in which they held fast to their position that expenses paid for with forgiven PPP loan proceeds are nondeductible.

In Rev. Rul. 2020-27 the IRS addresses an issue the vast majority of PPP loan recipients are dealing with: the PPP loan was received and qualified expenses were paid from loan proceeds in 2020, but loan forgiveness is not received until 2021.  The revenue ruling describes two situations a taxpayer might find themselves in:

Situation 1: A taxpayer receives a PPP loan in 2020 and applies for forgiveness at the end of 2020 (knowing the amount of qualified expenses eligible for forgiveness), but has not received a determination on loan forgiveness.

Situation 2: A taxpayer receives a PPP loan but has not applied for loan forgiveness by the end of 2020.  However, the taxpayer knows the amount of qualified expenses eligible for forgiveness.

 In both situations the guidance indicates that the taxpayer should not deduct the qualified expenses in 2020 if, at the end of the tax year, the taxpayer reasonably expects to receive forgiveness for the qualified expenses paid.

Senate Finance Chairman Chuck Grassley and Democrat Ron Wyden pushed back on this guidance with a joint statement on Thursday, titled “Treasury Misses the Mark on PPP Loan Expense Deductibility Guidance”.  The statement expresses disappointment in the IRS for doubling down on its position and urges them to reconsider the deductibility of expenses paid for with forgiven PPP loan proceeds.  The statement also reiterates lawmaker’s intent that businesses would (1) not be taxed on forgiven loan proceeds, and (2) still receive the benefit of expenses paid for with forgiven PPP loan proceeds.

This immediate response provides hope that lawmakers will include a fix in year-end legislation that would reverse the IRS’ position.  It is the author’s opinion that will be the case, and the expenses paid for with forgiven PPP loan proceeds will eventually be fully deductible.

For more assistance with PPP loan forgiveness questions, contact your Larson advisor today.