On November 18, 2020 the U.S. Treasury Department and Internal Revenue Service (IRS) released Rev. Rul. 2020-27 and Rev. Proc. 2020-51 clarifying the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the tax year the loan was received.
In summary, if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible in the year the funds were used for allowable/ forgivable expenses. This applies whether the business has filed for forgiveness or not.
In the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses, either on the subsequent year return or on an amended return.
Given this guidance, we encourage businesses to file for forgiveness as soon as possible which still maximizes the amount of forgiveness. We also recommend that clients evaluate their year-end planning as this guidance can significantly alter a business’s net income.
As always, you may contact us to discuss the effects of this guidance and to review your tax planning.