The IRS released new guidance on November 18, 2020, on the deductibility of business expenses that were paid using a Paycheck Protection Program (“PPP”) loan.

General Rule

On May 2, 2020, the IRS issued Notice 2020 32 clarifying that a taxpayer could not deduct “eligible expenses” paid using proceeds from a PPP loan that were forgiven or that the taxpayer reasonably expected to be forgiven, regardless of whether the taxpayer filed its application for loan forgiveness. Recall that eligible expenses are limited to business expenses incurred for certain payroll expenses, mortgage interest expenses, rent payments, and utility payments.

Exception

On November 18, 2020, the IRS released additional guidance (Rev. Rul. 2020 27 and Rev. Proc. 2020 51) concerning the deductibility of eligible expenses. The new guidance sets forth two “safe harbor” exceptions to the general rule. Under the first exception, a taxpayer is permitted to deduct eligible expenses to the extent that the SBA denies the taxpayer’s request for loan forgiveness. Under this exception, the deduction may be taken either in 2020 (on an original or amended tax return) or in the year the SBA denies forgiveness. Under the second safe harbor exception, a taxpayer is permitted to deduct eligible expenses to the extent that it irrevocably elects not to seek loan forgiveness with respect to those expenses. Under this exception, the deduction must be taken in 2020 (on an original or amended tax return). In order to deduct the eligible expenses under either safe harbor exception, the taxpayer must attach a statement to its tax return for the year the taxpayer deducts the eligible expenses. The contents of the statement are set out in Rev. Proc. 2020 51.

Notice 2020-32

Rev. Rul.2020-27

Rev. Proc. 2020-51
  

If you have any questions, please feel free to contact Kemp Smith’s Business Department at 915-533-4424.