Internal Revenue Service Issues More Rules On PPP Tax Implications

Earlier this year, the U.S. Internal Revenue Service (IRS) issued guidance denying deductions for trade and business expenses (e.g., payroll) associated with U.S. Small Business Administration Paycheck Protection Program loans that are forgiven. Under federal law, PPP loans are not considered as taxable income so the IRS argued that, by limiting deductibility, it is preventing a “double tax benefit.” The IRS policy undermines the critical liquidity support that Congress intended to provide to small businesses, however.

Then, on November 19, the IRS took another step that could harm employers, issuing additional guidance that says expenses are non-deductible even if the business only “reasonably expects to receive forgiveness of the covered loan …” That is, “even if the taxpayer has not submitted an application for forgiveness” – but intends to – expenses should not be deducted, this year or next.

Fortunately, a second IRS Revenue Ruling (RR 2020-51) does provide a “safe harbor” in the event a loan recipient has a loan denied or not forgiven. That ruling provides procedures for the borrower to follow to go ahead and claim the deduction for the expenses paid with (unforgiven) loan proceeds.