Treasury and the IRS have released two pieces of guidance on the tax treatment of expenses paid for with a Paycheck Protection Program (PPP) loan.
Rev. Rul. 2020-27, released late in the evening on November 18, provides sub-regulatory guidance on whether a PPP loan participant who paid or incurred certain otherwise deductible expenses can 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 the loan to be forgiven. Additionally, the revenue ruling provides guidance regarding PPP loan participants who have not applied for forgiveness in 2020 but intend to in the following taxable year.
The PPP, created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, (P.L. 116-136), provided forgivable loans to eligible small businesses, certain non-profit organizations, veteran’s organizations, Tribal business concerns, independent contractors, and self-employed individuals adversely impacted by the COVID-19 pandemic.
Generally, Treasury states that if a business reasonably believes a PPP loan will be forgiven, expenses related to the loan are not deductible, regardless of whether the business has yet filed for forgiveness. However, in the case where a PPP loan is expected to be forgiven in the future but is, in fact, not, applicable business expenses can be deducted.