Update on deductibility of expenses paid with forgiven PPP loan proceeds

Current status: expenses paid with PPP funds that are forgiven or reasonably expected to be forgiven cannot be deducted in 2020

In Notice 2020-32 the Treasury Department determined that taxpayers whose PPP loans are forgiven cannot deduct the business expenses paid with the forgiven loan proceeds. On November 18, the IRS published Rev. Rul. 2020-27 clarifying the mechanics in Notice 2020-32. In the ruling the IRS laid out two scenarios. In the first, a borrower pays expenses that qualify under the CARES Act as valid forgivable expenditures. The borrower applies for forgiveness in November 2020 satisfying all the CARES Act forgiveness requirements but doesn’t have a definitive answer as to whether the loan will be forgiven. In the second scenario, the borrower pays the same valid expenses with its PPP loan and expects to apply for forgiveness in 2021. The revenue ruling provides that the businesses in both scenarios are not allowed to deduct the PPP funded expenses in 2020 because they have a reasonable expectation of forgiveness. Some practitioners have challenged the legal basis for the IRS’s position.

Congress proposed deductibility

A summary framework of  the $908 billion Bipartisan Emergency COVID Relief Act of 2020 (a recent stimulus proposal supported by a group of lawmakers from both parties and garnering significant attention) was released on December 9, 2020. As part of the PPP section of the proposal the following bullet is included: “Business expenses paid for with the proceeds of PPP loans are tax deductible, consistent with Congressional intent in the CARES Act.” Previous congressional proposals have demonstrated bipartisan support for the deductibility of such expenses which indicates this provision has a stronger likelihood of remaining in the statute if ultimately passed.

Mazars Insight

Mazars will continue to monitor congressional action which may settle this issue prior to the end of the year. Absent a change in law, claiming a deduction in 2020 for PPP expenses reasonably expected to be forgiven, could result in the disallowance of such deductions and accuracy related penalties.

 Please contact your Mazars LLP professional for additional information.

Published on December 15, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.