IRS Guidance Nixes 2020 Expense Deductions for PPP Loans Forgiven in 2021

November 19, 2020

The IRS last night released guidance disallowing 2020 deductions for expenses that will give rise to forgiveness of Paycheck Protection Program loans - even if the forgiveness isn't applied for and confirmed until 2021.

Revenue Ruling 2020-27 says that the expenses aren't deductible because the taxpayer has "a reasonable expectation of reimbursement" for the expenses. The ruling also says:

Section 265(a)(1) of the Code also disallows any amount of A’s and B’s eligible expenses otherwise allowable as a deduction under the Code, including section 161, to the extent the payment of such eligible expenses is allocable to tax-exempt income in the form of the reasonably expected covered loan forgiveness. The fact that the tax-exempt income may not have been accrued or received by the end of the taxable year does not change this result because the disallowance applies whether or not any amount of tax-exempt income in the form of covered loan forgiveness and to which the eligible expenses are allocable is received or accrued.

The ruling was accompanied by a revenue procedure (Rev. Proc. 2020-51) giving taxpayers whose requests for PPP forgiveness are denied in whole or part in 2021 the ability to deduct related expenses in either 2020 or 2021. 

The IRS provided no additional guidance on the proper treatment of the income in computing the ability of S corporations to distribute 2020 earnings.

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