We initially communicated information about the Paycheck Protection Program to our clients here and subsequently provided an update about ongoing clarifications from the Treasury here. We will continue to provide periodic updates, but we strongly urge that affected businesses seek guidance from their tax advisors.
The federal government initiated the Paycheck Protection Program (“PPP”) at the beginning of the COVID-19 pandemic. The purpose of the program was to assist small businesses with payroll and other operating expenses so that they could keep their employees during this period of substantial economic uncertainty. If the PPP loan proceeds were used to support payroll and operating expenses, the loan would be forgiven. In May the IRS issued public guidance that advised PPP borrowers that have their loans forgiven that they will not be able to deduct expenses, such as payroll (referred to as “PPP Loan Expenses”), that supported their forgiven loan. The reasoning is that you cannot deduct PPP Loan Expenses that supported the creation of nontaxable income.
Many PPP borrowers planned to apply for loan forgiveness in 2021 and defer the recognition of the loan forgiveness until 2021. However, new guidance from the IRS (Revenue Ruling 2020-27) was issued in November specifically addressed the timing of the denial of the Loan Expenses that supported the PPP borrower’s loan.
The IRS stated that if borrowers “reasonably expect” to receive forgiveness of their PPP loan in the future, they will not be able to deduct the PPP Loan Expenses in 2020. This is the result whether the PPP borrower has filed for forgiveness in 2020 or 2021. While there are lobbying groups currently putting pressure on Congress to address this issue, end-of-year tax planning cannot wait. This elimination of potentially hundreds of thousands of dollars in Loan Expenses is a tax planning consideration all PPP borrowers must consider before year-end.
We recommend discussing this issue with your tax advisors as soon as possible.