On November 18, 2020, The U.S. Treasury and IRS issued guidance to clarify the tax treatment of expenses where a business received a PPP loan which has not been forgiven by the end of the year the loan was received.
In May 2020, the IRS clarified that since loan recipients are not taxed on the proceeds of a forgiven PPP loan, expenses are not deductible. The end result is neither a tax benefit nor a tax harm.
Pursuant to IRS Revenue Ruling 2020-27, in summary, if a business reasonably believes that their PPP loan will be forgiven in the future, then expenses related to the loan are not deductible. It should be noted that the IRS has not specifically defined “reasonable belief” at this time. It does not matter if the business has already filed for forgiveness or not by the end of 2020, it’s based on the business satisfying all other requirements for forgiveness of the covered loan. Businesses are encouraged to file for forgiveness as soon as possible.
Should the business not be forgiven for the all or part of the loan, those expenses attributable to the unforgiven portion of the loan would then be deductible. The timing of knowing the amount of the loan that is not forgiven will effect which tax year the expenses can be deducted, whether it would be 2020 or a future tax year. More specific information is available in IRS Revenue Procedure 2020-51.