IRS Guidance Issued on Deductions Funded with PPP Loans

November 19, 2020

On November 18, 2020, the Internal Revenue Service (IRS) released Revenue Ruling 2020-27 and Revenue Procedure 2020-51 providing taxpayers guidance on the treatment of expenses related to forgiven Paycheck Protection Program (PPP) loans.  This guidance is a follow-up to the IRS’s previous guidance on the disallowance of deductions for expenses related to the forgiveness of a PPP loan, under Notice 2020-32.

Revenue Ruling 2020-27 provides taxpayers with two scenarios related to the timing of disallowance of the PPP related deductions.

  • Scenario 1 involves a taxpayer who received a PPP loan during 2020 and incurred eligible expenses during the covered period. In November 2020, the taxpayer applied to the lender for forgiveness of the PPP loan and believes based on eligible expenses it paid during the covered period that it satisfied all requirements for complete loan forgiveness.  The lender does not inform the taxpayer whether the loan will be forgiven before the end of 2020.
  • Scenario 2 involves a taxpayer who similarly received a PPP loan during 2020 and incurred eligible expenses during the covered period. However, in scenario 2, the taxpayer does not apply for loan forgiveness before the end of 2020.  Although, based on the payment of eligible expenses during the covered period, the taxpayer in scenario 2 expects to meet the requirements for loan forgiveness under the CARES Act, and expects to apply for loan forgiveness in 2021.

Under Revenue Ruling 2020-27, the taxpayers in both scenario 1 and 2 reasonably expect to receive full loan forgiveness under the provisions of the CARES Act.  Based on the reasonable expectation of loan forgiveness, the IRS determined that a deduction for the eligible expenses in both scenarios would be disallowed in 2020.

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