On November 18, 2020, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released guidance related to the Paycheck Protection Program (PPP) and the deductibility of expenses paid with PPP funds. One advantage specific to the PPP was that any portion of the funds forgiven would not result in taxable income, but the IRS later asserted that the expenses would not be deductible as well, resulting in the need for any business that received PPP funds to engage in year-end planning.

Deductible expenses paid with funds received from PPP loan proceeds during the taxpayer's 2020 tax year are not deductible if the taxpayer reasonably expects the PPP loan to be forgiven in the subsequent taxable year (Revenue Ruling [Rev. Rul.] 2020-27). Whether or not the forgiveness application is filed does not impact the deductibility treatment.

A safe harbor allows a taxpayer to deduct some or all of the aforementioned expenses if, in the subsequent tax year, he or she learns that a portion or all of the PPP loan is not forgiven (Revenue Procedure [Rev. Proc.] 2020-51). If such a scenario arises, a taxpayer may deduct some or all of the eligible expenses on:

1. The taxpayer's timely filed (including extensions) original income tax or information return for the 2020 taxable year;
2. An amended return or an administrative adjustment request (AAR) for the 2020 tax year; or
3. The taxpayer's timely filed (including extensions), original income tax or information return for the subsequent taxable year.

In the event the safe harbor provisions apply to a taxpayer, he or she must attach "Revenue Procedure 2020-51 Statement" to the return filings. This statement asks for specific information, such as name, address, employer identification number, total amount of covered loan forgiveness denied (with date of denial), and total amount of eligible and non-deductible expenses reported on the return.

PYA remains committed to keeping you up-to-date on the latest PPP and COVID-19-related news. If you need assistance with PPP forgiveness or year-end planning, or would like additional COVID-19 guidance, visit our COVID-19 hub, or contact one of our PYA executives below at (800) 270-9629.

Disclaimer: To the best of our knowledge, this information was correct at the time of publication. Given the fluid situation, and with rapidly changing new guidance issued daily, be aware that some or all of this information may no longer apply. Please visit our COVID-19 hub frequently for the latest updates, as we are working diligently to put forth the most relevant helpful guidance as it becomes available.

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