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As we reported back in May in a previous blog post (IRS Will Disallow Deductions Related to Forgiven Loans Under the Paycheck Protection Program), the IRS stated in Notice 2020-32 that no deduction would be allowed for expenses that result in the forgiveness of a PPP loan. While this appears to be contrary to the intent of Congress since the CARES Act provided that loan forgiveness would be treated as tax-exempt income, the bill was unfortunately silent in regard to the deductibility of PPP related expenses. Therefore, absent of any clear legislative language on the issue of deducibility, the IRS had to make its own determination based on existing tax statute and principles. This resulted in the nondeductibility of PPP related expenses since they were allocable to tax-exempt income.
After this guidance was released, one issue that remained unclear was what happens if loan forgiveness is applied for and/or received in the following year from when the expenses are incurred. In other words, could a taxpayer deduct PPP related expenses in 2020 if they waited until 2021 to seek loan forgiveness?
On Wednesday, the IRS released additional guidance settling the issue by stating that the IRS will not allow PPP related expenses to be deducted in the year paid or incurred if at the end of such taxable year the taxpayer reasonably expects to receive loan forgiveness regardless of whether they’ve applied for forgiveness.
Fortunately, there is bipartisan support in Congress to allow for the deductibility of PPP related expenses and many expect that the issue will be addressed in the next COVID-19 relief package. However, until a bill is actually passed to amend the legislation, the PPP related expenses will remain nondeductible in 2020.
As always, Lanigan, Ryan, Malcolm & Doyle will continue to monitor the evolving business landscape and add updates to our COVID-19 resource center as they become available. As an “essential” business in the state of Maryland, we will continue to work for clients to meet upcoming deadlines, while emphasizing the safety of both our clients and our team. Please know that your Lanigan, Ryan team members are always available for questions.