To our Valued Clients and Associates,

Late Wednesday night, November 18th, the IRS released Revenue Ruling (Rev. Rul.) 2020-27 and Revenue Procedure (Rev. Proc.) 2020-51 to clarify the rules for deducting expenses paid with PPP funds. While we have been looking for more clarity and guidance from the IRS, this was not the news we were hoping for. The Rev. Rul. essentially re-confirmed the IRS’ position from last May that any expenses paid with forgiven PPP loan proceeds are not deductible, but also made an important clarification on exactly when they were not deductible.  Rev. Rul. 2020-27 states that even if a borrower “has a reasonable expectation of reimbursement” the deduction is not appropriate.  In plain terms, the IRS is saying that if a borrower has not had their loan forgiven by year-end, they cannot deduct the expenses paid for by PPP funds, if they reasonably expect that the loan will be forgiven after year-end.

The ruling gives the following example: the taxpayer (designated as B) hasn’t applied for forgiveness by the end of 2020 (which will be the case for many of you out there) but has satisfied all of the requirements under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and expects to apply for forgiveness in 2021. The rule states “at the end of 2020 B both knew the amount of eligible expenses that qualified for reimbursement in the form of covered loan forgiveness and has a reasonable expectation of reimbursement.” Because that reimbursement of the loan was “foreseeable,” B may not deduct their eligible expenses.

If the PPP loan is not forgiven or is only partially forgiven, then any expenses paid with an unforgiven or partially forgiven loan will be deductible, up to the amount that is unforgiven.

It is important to note, that the Committee on Finance issued a statement on November 19 that urged the IRS to reconsider its position on the deductibility of expenses paid with PPP funds and stated “We continue our efforts to clarify in any end- of- year legislation the intended relief in the CARES Act…”

What does this all mean?  Until new guidance or laws are issued, the expenses paid by PPP loans are not deductible on your 2020 tax return even if the loan has not yet been forgiven, but, you expect that it will be forgiven in 2021.  We at PFC will continue to monitor this roller coaster situation and will let you know if there is any change or updates as soon as we get them.

As always, we will advise you of any additional guidance as it becomes known. If you have any questions, please contact us directly.