IRS Guidance on Deducting Expenses Paid with PPP Loans

The IRS and Treasury has issued guidance on tax treatment of expenses when a loan from the Small Business Administration’s Paycheck Protection Program (PPP) hasn’t been forgiven by the end of the year.

The IRS takes the position that since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible. This means there is neither a tax benefit nor harm, since the taxpayer has not paid these expenses from their own funds. For 2020 tax planning purposes, we suggest estimating no deduction for expenses paid using PPP loan proceeds. Therefore, taxable business income would increase by the amount of PPP qualifying expenditures, limited to the loan amount.

If the business reasonably believes that a PPP loan will be forgiven, expenses related to the loan aren’t deductible (even if the business has not filed for forgiveness). The IRS and Treasury are encouraging businesses to file for forgiveness as soon as possible.

Additionally, the ruling provides safe harbors for deductions of taxpayers who do not receive the expected amount of forgiveness, or who decide not to pursue loan forgiveness.

It is still possible that Congress will pass legislation making the expenses deductible. It is highly unlikely that will happen in the lame duck session that is about to begin but is possible by the end of January in the new Congress.

While this ruling provides some guidance, we expect additional clarification. To read the full revenue ruling and procedure click here.