Deductibility of PPP Funded Expenses – IRS Revenue Ruling 2020-27

Much to the dismay of taxpayers and CPAs the IRS doubled-down on its May Notice 2020-32 which stated that expenses which lead to PPP loan forgiveness are non-deductible, by issuing Revenue Ruling 2020-27 on 11/18/20.  This revenue ruling states that:

“A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”

In summary, not only is the IRS stating the PPP loan is taxable but that it is taxable at the point in time forgiveness is reasonably expected, regardless of SBA approval or even timing of forgiveness application submission.  With yet another late rule change in guidance surrounding the PPP loan, the IRS added even more uncertainty for companies when it comes to tax planning.  Prior to the ruling many taxpayers had thought that potential taxation of this loan would be next year at the earliest.

Some commentators feel that this IRS position of making the loan forgiveness taxable is considered over-reaching, lacking authority and need not be relied upon.  It entirely contradicts Congressional intent.  The issuing of Wednesday’s revenue ruling has already elicited Congressional commentary from both parties indicating legislation to be passed by year-end (potentially as soon as December 11) that would override IRS guidance and make the PPP loans entirely non-taxable.

The easiest solution to this tax planning quandary is for Congress to make good on continued promises since May that they would overturn the IRS’ position.  Until this occurs Companies will be in an undesirable position of not being able to properly tax plan.

We will keep you updated as new information becomes available. As always, please feel free to reach out to your Davie Kaplan client service team if you have any questions. We are always here to help!