Business Counselor December 17, 2020 Michael J. Huff

IRS Confirms Expenses Paid with PPP Proceeds Not Deductible

Congress changed the deductibility of expenses paid with PPP proceeds with passage of its COVID relief bill. Click here for more information.

IRS guidance issued regarding the deductibility of expenses which were paid with PPP loan proceeds has left taxpayers disappointed, as the IRS has taken the position that such expenses cannot be deducted for purposes of federal taxes as long as the taxpayer expects to receive forgiveness of the PPP loan. The foregoing limitation on deductibility of expenses paid with PPP loan proceeds, set forth in Rev. Rul. 2020-27, applies even if the taxpayer has not yet submitted its application for forgiveness of its PPP loan.

In Notice 2020-32, the IRS justified its interpretation that expenses paid with PPP loan proceeds are not deductible by finding that income associated with PPP loan forgiveness will be tax-exempt income as income that is “wholly excluded from gross income.”

Certain advocacy groups have taken positions counter to the IRS’s position, including advancement of the argument that expenses such as payroll should be deductible because there is no direct link between the payment of expenses and the tax-exempt income which is recognized upon loan forgiveness. It remains possible that the United States Congress could address this issue prior to the end of 2020 and determine expenses paid with PPP loan proceeds are deductible. However, this position is not presently endorsed by the IRS. Thus, in the event a taxpayer wishes to take a position contrary to Rev. Rul. 2020-27 and Notice 2020-32, the taxpayer should work with its tax advisor to determine if certain disclosures need to be made in connection with the taxpayer’s financial statements.

For taxpayers who do not expect to receive full forgiveness of their PPP loan, the IRS has provided a safe harbor set forth by Rev. Proc. 2020-51. To the extent a taxpayer is denied forgiveness of PPP loan proceeds, either in full or in part, the taxpayer may deduct certain expenses on either its 2020 tax return or by filing an amended 2020 tax return or administrative adjustment request.

Contact your Mika Meyers’ attorney with questions regarding possible tax positions your business may take regarding your PPP loan.