For those who have Paycheck Protection Program (PPP) loans, the IRS has taken the position that you can not deduct business expenses that were paid from the PPP proceeds if those proceeds are forgiven. Under the CARES ACT, loans that are forgiven are not subject to income taxation.

Revenue Ruling 2020-27

Now, the IRS has issued Revenue Ruling 2020-27 which provides:

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.

Bottomline

Simply stated, if you reasonably expect to receive a PPP loan forgiveness in 2021, you may not deduct the expenses paid in 2020 that were paid from the loan proceeds.

This is obviously not good for any of us business owners and Congress needs to fix this. There will also likely be litigation on this position if Congress fails to act.

Stay tuned…