Over the last few weeks, most of us have been occupied watching the drama in Washington DC. Which also led many of us to wonder whether there will be additional Federal stimulus or maybe even a little more clarity from the government anytime soon. Well, the Internal Revenue Service decided it was close enough to the holidays to take on the role of the Grinch and add some clarity of its own.

We have previously reported that pursuant to IRS Notice 2020-32, 2020-21 IRB 837, the agency had taken the position that expenses funded with the forgiven PPP loans weren’t deductible so as to avoid a double tax benefit. There has been substantial debate as to whether there would be some legislative relief on this issue but none has been forthcoming thus far.  On November 18, in releasing Revenue Ruling 2020-27 (copy attached), the IRS further laid to rest debate as to how to treat expenses in 2020 where forgiveness had not yet been approved.

The IRS laid out two scenarios in the revenue ruling. In the first scenario, a borrower pays expenses such as payroll and rent that qualify under the CARES Act as valid PPP expenditures. This borrower applies for forgiveness in November 2020 and satisfies all the requirements under the CARES Act to have the total loan forgiven, but it doesn’t yet have an answer as to whether it will be forgiven from its lender.

In scenario two, the borrower paid the same type of valid expenses with its PPP loan and satisfies the CARES Act requirements for the loans, but it expects to apply for forgiveness in 2021.

According to the ruling, the businesses in both scenarios can’t deduct expenses funded with PPP loans because they have a reasonable expectation of forgiveness.

“A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act 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 ruling concluded.

It becomes even more essential that for those of you who have received PPP funds that your year-end tax planning takes this issue into consideration. The monies received under the PPP that you have used to help maintain your business operations are now effectively taxable.

If you need our guidance we are here to help. Please reach out to us at your convenience to discuss the impact this may have on your business.