U.S. Internal Revenue, IRS provides guidance on deductibility of PPP loans

The Treasury and the IRS have issued two instructions on the tax treatment of expenses paid with a loan from the Paycheck Protection Program (PPP).

2020-27, released late in the afternoon on November 18, provides sub-regulatory guidance on whether a PPP loan participant who paid or incurred certain deductible expenses can deduct those expenses in the taxable year in which they were paid or expenses were incurred if, at the end of that taxable year, the taxpayer reasonably expects the loan to be forgiven. Additionally, the income resolution provides guidance on PPP loan participants who have not applied for forgiveness in 2020 but intend to do so in the following year.

The APP, created under the Coronavirus Economic Relief, Relief and Security Act (CARES), (PL 116-136), provided reliable loans to eligible small businesses, certain nonprofits, veteran organizations, tribal business concerns, contractors independent and autonomous individuals negatively affected by the COVID-19 pandemic.

Generally, the Treasury states that if a business reasonably believes that a PPP loan will be forgiven, the expenses related to the loan are not deductible, regardless of whether the business has yet submitted a discharge. However, if a PPP loan is expected to be forgiven in the future and is not, business expenses that apply can be deducted.