IRS and Treasury Release Guidance on Deductibility of PPP Expenses

On November 18, the Department of Treasury and IRS released long-anticipated guidance regarding the tax treatment of expenses used to support Paycheck Protection Program (PPP) loan forgiveness.

IRS Notice 2020-32, released earlier this year, stated that expenses are not deductible if the payment of that expense results in forgiveness. While some Congressional leaders have proposed that the IRS notice was not consistent with legislators’ intent, no Congressional action has been taken to date that would overturn the IRS notice. Further, little additional guidance was released for borrowers and taxpayers.

This week’s guidance now offers some clarity. The revenue ruling (2020-27) and revenue procedure (2020-51) explain that businesses “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.”

The guidance means that PPP loan borrowers expecting forgiveness cannot deduct the expenses generating forgiveness in the taxable year the expenses occurred. The deductibility of these expenses is not dependent on the borrower submitting a forgiveness application nor on the borrower receiving forgiveness. It is only dependent on whether the borrower “reasonably expects to receive forgiveness.”

If a borrower reasonably expects forgiveness and does not deduct the expenses, and it is later determined that their loan is not forgiven, the expenses may be deducted on their original or amended 2020 tax return or their original 2021 return.

PPP loan guidance continues to evolve. For questions about your PPP loan, forgiveness, or the newest IRS and Treasury guidance, please reach out to your HBK Advisor.

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About the Author(s)

Amy Reynallt, MBA
Amy Reynallt is a Manager with the HBK Manufacturing Solutions Group in the Youngstown, Ohio office of HBK CPAs & Consultants. She is experienced in navigating the strategic and financial matters associated with manufacturing and works closely with manufacturers to help them plan, execute, and meet their short- and long-term financial goals. Amy can be reached at 330-758-8613 or by email at areynallt@hbkcpa.com.

Nick Demetrios, CPA, MBA
Nick Demetrios is a Principal in the Youngstown, Ohio office of HBK CPAs & Consultants. He is a member of the HBK Tax Advisory Group and has experience with individual, partnerships and corporate tax compliance and research issues. You can contact Nick at 330-758-8613, or by email at ndemetrios@hbkcpa.com.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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