Alert! IRS Affirms Non-Deductibility of PPP-Funded Expenses

In a move that will disappoint many business owners and leaders, the IRS has affirmed its earlier position that taxpayers cannot claim an income tax deduction for business expenses that would otherwise have been deductible if the payment of that expense results in forgiveness of a Paycheck Protection Program (PPP) loan. The PPP loan program was created under the CARES Act passed earlier this year in response to the COVID-19 crisis.

The guidance came in the form of a revenue ruling (Rev. Ruling 2020-27.) (A revenue ruling is a public decree from the IRS, instructing all taxpayers how the IRS will interpret and apply tax legislation. A revenue ruling is generally treated as a law.) Additionally, the IRS has issued Revenue Procedure 2020-51, which provides taxpayers with guidance on how to implement the IRS’s position.

This newest development comes even though some Congressional leaders, as well as some tax professional organizations like the AICPA, have previously disagreed with the IRS’s interpretation of this portion of the CARES Act.

The IRS’s guidance means a taxpayer cannot claim an income tax deduction for expenses used in the PPP loan forgiveness calculation. For companies that used PPP funds to pay expenses that ordinarily would have been deductible, the IRS’s ruling effectively increases a business’s net income and resulting tax liability.

Furthermore, the IRS states that if PPP loan forgiveness has not yet happened, borrowers cannot deduct expenses paid for with PPP funds this year (in 2020) if the taxpayer reasonably believes the loan will be forgiven next year.

Ultimately this affirmation by the IRS appears to likely stand, as there seems to be little serious effort out of Congress to legislate a different IRS interpretation of the CARES Act, especially with the US Presidential election over and COVID-19 continuing to spread.

Business owners and leaders must confer with their tax advisors to review the impact of this IRS action.

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recessions, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.