With a lack of previous guidance, some tax advisors have told clients to wait until 2021 to apply for forgiveness of their Paycheck Protection Program (PPP) loans. They thought that if the debt forgiveness didn’t happen until 2021, the expenses paid using the loan might be deductible for 2020.
The IRS has now issued guidance, Revenue Ruling 2020-27, that says that conclusion is incorrect.
Here’s a URL to see the ruling. https://www.irs.gov/pub/irs-drop/rr-20-27.pdf
On May 2, 2020, the IRS issued Notice 2020-32. According to that Notice, no deduction is allowed for an eligible expense that would otherwise be deductible if it was paid with funds of a PPP loan that is forgiven.
In Revenue Ruling 2020-27, the IRS clarifies that when a taxpayer satisfies all of the requirements (having qualified expenses during 2020) and expects to apply for forgiveness of the related PPP loan, those expenses aren’t tax-deductible for 2020, even when the application for forgiveness isn’t made until 2021.
The SBA has issued forms to apply for PPP loan forgiveness. Many businesses are still waiting to receive instructions from their lenders on how to apply.
Once the lenders issue their instructions, business owners can proceed with applying for forgiveness without being concerned about a tax consideration for when the application for forgiveness is submitted.
There is still a remote possibility Congress could enact a technical correction allowing tax deductions of expenses paid using funds from a forgiven PPP loan. With not much year left and the attention of the Senate focused on approving federal judicial appointments by Donald Trump, it seems unlikely we will see this legislation before 2021.